Building your portfolio through an ‘anchor stock’

By Robert Ochieng 

I always get questions from first-time Nairobi Securities Exchange (NSE) investors regarding shares to buy. So, I was not caught flat-footed when my younger sister approached me with numerous queries about opening a brokerage account. After reassuring her that one can never be too young to start investing, I threw more layers of questions to her: What is your risk tolerance? What is your long-term goal? What company do you really love and believe in?  How does the company’s balance sheet look? Does it pay a dividend? Does it have a moat?  

A moat, as popularized by Warren Buffet, the richest investor in the world, is durable competitive advantage. For example, it is not quite easy to come up with a new mobile phone-based money transfer service that will replace M-PESA.

As it is important for a first-time investor, I asked her to identify an anchor stock; a company that she loves and understands better than any other. I strongly believe that this should be the first investment you make because it is one you’ll be proud to hold on to forever. In addition, it can weather economic downturns, and you can build an entire portfolio around it. Here are some characteristics that best describe an anchor stock:

It is a stock you will continue to top up forever and never sell. 

It is usually a large or mega-cap stock such as Safaricom, or East African Breweries Limited, meaning that its stock price movement is not volatile, quite literally ‘anchoring’ your portfolio. 

It pays or has the potential to pay dividends, which in turn can be reinvested into your portfolio or used as income later in your investing life. 

It’s a stock that represents the largest portion of your portfolio. 

Some of you already have anchor stocks but may not be aware of it. It is important to identify one that you can rely on with a long-term plan in mind for a number of reasons;

First – by building a strong core in your portfolio, it allows you to assess your own tolerance for risk. If you are an investor who likes to ‘put it all on red’ with a number of high-risk, high-reward investments, then an anchor is a great way of mitigating against the downsides of these risks. 

Second – for every investment in the likes of Longhorn, or Kengen, you should also be investing as much, if not more, in your anchor stocks. This can minimize the damage in case these riskier businesses fall on hard times. 

You should also diversify your portfolio. This way, should the market enter a volatile stage as it has done in 2020, when those riskier stocks begin flashing red, your less volatile ‘anchors’ will keep your portfolio from plummeting. It is a risky strategy, but one that might just give you a strong base from which you are able to invest in riskier endeavors, knowing that your anchor can act as a safety-net of sorts for that behavior. 

Third – another important piece of information you can glean from your anchor stock is whether it will help you achieve your long-term financial goals. There is no harm in having one or more anchor stocks that have already had long-term, consistent annual growth and see how this lines up with your own plan.

Before that, however, you need to understand the power of compounding and the fact that in the short term, prices of shares move up and down but in the long run, they reflect the true value of the companies.

Personally, my anchor stock was Equity Bank.

To get started on building a solid shares portfolio, you will need to first open a CDS account with a custodian bank or stock brokerage firm – CDS account is similar to a standard bank deposit account and acts as a means of representing ownership and movement of listed securities. Then, fund the account. And lastly, buy your first shares.   

Writer is CEO of finance management company, Abojani Investment.

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