HIDALGO GROUP LTD'

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HIDALGO GROUP LTD.

• PORTFOLIO MANAGEMENT MARKET ANALSIS- FINANCIAL
  MAGAZINE.

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INTRODUCTION TO SHARES.

• Want to own part of a business without having to
  show up at its office every day? Or ever? Stock
  is the vehicle of choice for those who do. Dating
  back to the Dutch mutual stock corporations of
  the 16th century, the modern stock market exists
  as a way for entrepreneurs to finance businesses
  using money collected from investors. In return
  for ponying up the dough to finance the company,
  the investor becomes a part owner of the company.
  That ownership is represented by stock --
  specialized financial "securities," or financial
  instruments -- that are "secured" by a claim on
  the assets and profits of a company.

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TYPES OF STOCKS

• Common Stock. Common stock is aptly named, as it
  is the most common form of stock an investor will
  encounter. It is an ideal investment vehicle for
  individuals because anyone can own it there are
  absolutely no restrictions on who can purchase
  it. Young, old, savvy, reckless -- heck, even
  professional mimes are allowed to own stock.
  Common stock is more than just a piece of paper
  it represents a proportional share of ownership
  in a company -- a stake in a real, living,
  breathing business. By owning stock -- the most
  amazing wealth-creation vehicle ever conceived
  (except for inheriting money from a relative
  you've never heard of) -- you are a part owner of
  a business.
• Shareholders "own" a part of the assets of the
  company and part of the stream of cash those
  assets generate. As the company acquires more
  assets and the stream of cash it generates gets
  larger, the value of the business increases. This
  increase in the value of the business is what
  drives up the value of the stock in that business.

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HOW STOCKS TRADE

• To be able to trade in stocks at the stock
  exchange, the first thing that is crucial is
  that, the investor needs to have a CDSC account
  through one of the brokers, to enable the ease of
  purchase and sale of the securities. The account
  operates similar to the one of the bank, with the
  only difference being that a CDS account accepts
  the deposits of shares and not cash.
• Probably one of the most confusing aspects of
  investing is understanding how stocks actually
  trade. Words such as "bid," "ask," "volume," and
  "spread" can be quite confusing.
• The Nairobi Stock Exchange, the Ugandan one and
  the Tanzanian one are "listed" exchanges,
  meaning that brokerage firms contribute
  individuals known as dealers" who are
  responsible for all of the trading in a specific
  stock. Volume, or the number of shares that trade
  on a given day, is counted by the dealer and
  reported to the exchange along with information
  on the price and size of each trade.
• There is the element of bid, ask and spread. This
  is essentially controlled by the dynamics of the
  market- the demand and supply ratios. The
  crucial underlying element to all these is what
  we call the aspect of settlement, once the shares
  are reflecting in your CDS account after a
  settlement period of 4-6 days, then the shares
  will be balance free, meaning, they will
  available for any action from the investor or the
  portfolio manager.
• Trading of stocks various a lot with the
  different types of investor, with underlying
  issues of whether one is short term or long term,
  whether one has a portfolio manager or not,
  whether one is privy to the happenings at the
  market or not, which essentially behaves like the
  one for the sukuma wiki or the normal market day

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DIFFERENT CLASSES OF STOCKS

• Occasionally, companies find it necessary for
  various reasons to concentrate the voting power
  of a company into a specific class of stock where
  the majority is owned by a certain set of people.
  For instance, if a family business needs to raise
  money by selling equity, sometimes they will
  create a second class of stock that they control
  that has 10 votes per share of stock and sell a
  class of stock that only has one vote per share
  to others. Does this sound like a bad deal? Many
  investors believe it is and routinely avoid
  companies where there are multiple classes of
  voting stock. This kind of structure is most
  common in media companies and has been around
  only since 1987.
• When there is more than one kind of stock, they
  are often designated as Class A or Class B
  shares. For example, we would have Standard group
  A and Standard group B, they would trade as STD A
  and STD B simultenously.

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STOCKS DERIVATES-Options Futures

• Arguably the most volatile and risky investments
  possible, options and futures are "derivative"
  securities, meaning their value is "derived" from
  that of another security or commodity. Options
  and futures are both very volatile because they
  often carry an incredible amount of leverage. For
  instance, each option contract on an individual
  stock controls 100 shares of that stock for a
  fraction of the stock's current value. Since
  option traders have only invested a small
  percentage of the stock's price, any move in the
  price represents a big percentage change for
  their investment. Say they paid 5 per share for
  an option on a stock that sells for around 50 a
  share. If the price of the stock goes up 5,
  that's a 10 move in the price of the stock, but
  it's 100 of the option trader's investment. So a
  relatively small upward movement in the stock can
  be a huge upward movement for the option.
• This potential for gain is offset by the fact
  that the entire purchase price of an option is at
  risk. If an investor holds an option and the
  underlying stock does not exceed the target price
  within the given time period, the option expires
  worthless and the entire purchase price is lost.
  (Most options end up worthless on their
  expiration date.) Traders also have to cover the
  price of the option. That five-dollar increase in
  the value of the stock wouldn't actually make the
  trader any money if the option expires at that
  point. It would just have covered the cost of the
  option. And if you think this is getting
  complicated, we've barely scratched the surface!
• Hidalgo does not consider options and futures to
  be worthwhile investments, especially in an
  emerging economy like ours. Some people make a
  living trading derivatives -- they make their
  living trading against people like you. The
  chance of losing money with derivatives is much
  too high for options to be considered a useful
  part of any completely nutritious investment
  strategy.

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BUYING STOCKS

• Use a Brokerage. The most common way to buy
  stocks is to use a brokerage. In Kenya, we have
  the basic stock broker and then the investment
  banks that do offer brokerage services, like
  Faida Investment Bank. Both have varied services
  that they do offer to their clientele. Besides
  these, we do have stock agents who act on behalf
  of the principal stock broker and they do have
  added services that the broker might not be able
  to offer due to various reasons.
• Given the number of people investing in the
  equities, brokers are having it rough wit the
  aspect of human capital and resource. Thats why
  a company like Hidalgo has been formed with such
  an issue in mind to help the budding investor,
  focus on their primary job as Hidalgo does invest
  and circulate their capital in the equity market
  on a weekly basis. Basically this is the
  principal work of the portfolio manager. Based on
  market research and trends, key fundamental
  aspects of various companies, the investors
  funds are circulated every settlement cycle in
  various stocks, in the process, making money for
  the investor, as they are bought at a low price
  and sold at a high price, of even 0.50
  appreciation, as long the even breaking point is
  reached and surpassed. All these is done in the
  clients account so that the client is able to
  follow up on the progress of his funds to the
  last coin. Plus its easier for accountability
  issues.

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DIVIDEND REINVEST PLAN

• Dividend Reinvestment Plans (DRPs) and Direct
  Investment Plans (DIPs). Known lovingly by many
  investors as Drips, these are plans sponsored by
  individual companies that allow shareholders to
  purchase stock directly from a company with only
  minimal costs or commissions. These plans are
  great for those who have small amounts of money
  but who are willing to invest it at regular
  intervals.

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SHORTING STOCKS

• If you buy a security with the expectation that
  the price will rise, you are "long" the stock.
  But you can profit from stocks that go down, too.
  This is an advanced investing technique called
  "short selling. Basically, at the end of the
  day, the investor has feelings, be it a
  corporate, whose fund manager is human, just like
  the retail investor like you and me, thus, the
  aspect of fear and greed do control us and a very
  interesting trend has been developing, when
  retail investors are off loading their holdings
  for various reasons, principally because its a
  crowd reaction, corporate and high net investors
  will be buying for accumulation at low prices
  from the panicking retail investor, only to sell
  to them again, two weeks later at premium prices,
  thus the retail investor loosing out, just
  because they didnt pat attention or hold the
  panic out. This is what we want to prevent and
  help our clients to make some good money.
• Properly done, shorting can work as a hedge
  against a falling market. Improperly done, you
  can lose even more money on a short than you
  would lose if you invested in a company that went
  bankrupt. Imagine that you buy a company for 50
  per share and it goes belly up. You've lost 50.
  (You should have shorted it!) But imagine
  shorting a stock for 50 that subsequently
  triples. When you close that short position, it
  will cost you 150 a share to buy back the shares
  you sold for 50. Many a short seller has been
  caught in this trap because brokers won't let you
  hold on to a short position unless you have money
  or other assets to cover the short at all times.

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INVESTING PROCESS

• What is investing? Any time you invest, you are
  putting something of yours into something else in
  order to achieve something greater. You can
  invest your weekends in a good cause, you can
  invest your intelligence in your job, or you can
  invest your time in a relationship. Just as you
  do each of these with the expectation that
  something good will come of it, when you invest
  your savings in a stock, bond, or mutual fund,
  you do so because you think its value will
  appreciate over time.
• Investing money is putting that money into some
  form of "security" - a fancy word for anything
  that is "secured" by some assets. Stocks, bonds,
  mutual funds, certificates of deposit - all of
  these are types of securities. As with anything
  else, there are many different approaches to
  investing. Some of these you've probably seen on
  late-night TV. A well-dressed, wildly positive
  (though somewhat whiny) young man sits lazily
  waving palm fronds and shakes his head over how
  incredibly easy it is to amass vast wealth - in
  no time at all! BUT you need to spend to be able
  to get..

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Planning Setting Goals

• Investing is like a long car trip. There's a lot
  of planning that goes into it.
• How long is the trip? (What is your investing
  "time horizon"?)
• What should you pack? (What type of investments
  will you make?)
• How much gas will you need? (How much money will
  you need to reach your goals?)
• Will you need to stop along the way? (Do you have
  short-term financial needs?)
• How long do you plan on staying? (Will you need
  to live off the investment in later years?)
• Running out of gas, stopping frequently to visit
  restrooms, and driving without sleep (this is the
  last of the travel analogy, we promise) can ruin
  your trip. So can saving too little money,
  investing erratically, or doing nothing at all.
• You must answer the following questions before
  you can successfully set about your
  savings/investing journey
• What are your goals? Is this money for
  retirement? A down payment on a house? Your
  child's education? A second home? Income to live
  on in the proverbial Golden Years?
• How much money can you devote to a regular
  investing plan?
• Don't let yourself get away with fuzzy answers,
  either. In the end, investing is a lot of
  numbers. You need to get used to that, and
  quickly. As a matter of fact, it can be quite
  liberating. You can see exactly what you need to
  get to your destination, and can be accountable
  to yourself along the way. Ask yourself some more
  pointed questions
• How much will college cost when my child needs to
  go?
• How much yearly income is reasonable for
  retirement?

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TIME IS ON YOUR SIDEAmerican Example

• To help put this into context, let's look at how
  various types of investments have performed
  historically. Bonds and stocks are the two major
  asset classes that have been used by investors
  over the past century. Knowing the total returns
  on each of these, and their associated
  volatility, is crucial to deciding where you
  should put your money.
• Putting your money into cash reserves - U.S.
  Treasury bills, or more recently, money market
  funds - has yielded roughly 4.2 per year during
  this century, according to Global Financial Data.
  While this may not seem like a lot today, it is
  important to remember that for most of this
  century, inflation was nonexistent, making a 4.2
  average annual return attractive until the 1960s.
  Though it is interesting that cash reserves have
  outperformed bonds this century, if one expands
  the time frame back to 1802, cash returns trail
  the return of bonds, and during the 1980s and
  1990s, cash reserves have consistently trailed
  bond returns.
• Long-term government bonds have returned around
  4.0 per year since 1900 surprisingly, they're
  not that superior to short-term bonds. The best
  decade for bonds in the past century was the
  1980s, when bonds returned 13.81 annually. The
  worst was the 1950s, when bonds lost -3.75. Had
  you invested 1 in long-term bonds in 1900, you
  would have about 50 today.
• Stocks have also been very good to investors.
  Overall, stocks have returned an average of 9.8
  per year since 1900 - quite a bit higher than
  bonds. Surprisingly, the range of the returns for
  stocks is not that much larger than the range for
  bonds over the same period. According to Global
  Financial Data, the worst return in one decade
  was the 1930s, when stocks declined 0.17 per
  year, including dividends. The best decades have
  been the 1950s, when stocks increased by 18.23
  annually the 1980s, when stocks increased by
  16.64 annually and the 1990s, during which
  stocks have increased by 17.3 annually. Had you
  put 1 into stocks in 1900, you would have over
  10,000 today.

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Determining your Investment Style

• What kind of investor are you? Are you a
  swing-for-the-fences type, or are you content
  hitting singles and doubles, racking up slow and
  steady gains? Or do you prefer to sit in the
  stands, chatting with your companions and
  occasionally cheering your home team on?
• Before you start investing, you should determine
  your investment style. There are three major
  variables in figuring out your investment style -
  your risk tolerance, the amount of time you can
  dedicate to investing and if you will be willing
  to pay for a portfolio manager to see your
  investment grow
• Risk. How comfortable will you be if you invest
  in something in which the price changes every day
  - sometimes not the way you want it to change?
  There are various degrees of risk across the
  investment spectrum, from government bonds, which
  are considered risk-free as they are guaranteed
  by the government, to commodities and options,
  where you can and often do lose all of your
  money.
• You need to consider how comfortable you will be
  seeing your investment decrease in the near term
  while you wait for it to increase over the long
  term. Although stocks have historically increased
  in price over the past two centuries, there have
  been some pretty bad periods. Without counting
  dividends, your equity investments could have
  lost almost 80 of their value had you bought
  stocks at the high in 1929 before the crash. You
  could have lost 40 had you bought at the high in
  1972. Heck, in October of 1987 the Dow decreased
  25 - in just one day! The important thing to
  remember about stocks, though, is that you don't
  lose anything until you sell them. For example,
  if you didn't panic and sell your stocks in
  October of 1987, you did quite nicely as the
  market rebounded in subsequent years. That's why,
  when you're investing in the stock market, you
  need to think long-term. Don't invest any money
  in stocks that you'll need in the short term.
• Government bonds provide guaranteed returns, and
  bank savings accounts are insured by the Central
  Depository Protection Fund DPF . For stock
  investing, there is no similar guarantee or
  insurance that the ride will be smooth or that
  every investment will make you money, but if you
  buy good businesses and hold for the long term
  AND OR circulate the funds with precision in
  various stocks, with the help of a portfolio
  manager, the odds are in your favor. Just
  remember that the safest road isn't always the
  best one. At Hidalgo Group, we believe that the
  biggest risk is not taking enough risk, meaning
  not investing enough in stocks.
• It should also be said that you can learn to
  increase your risk tolerance for investing in
  stocks. Once you see the kind of returns you can
  generate over time, you'll come to realize that
  it really doesn't matter if your stock drops or
  rises over the course of a few hours or days or
  weeks or even months. It may be fun to check your
  stock prices (and it's so easy on the Internet!)
  but it doesn't mean much over the long term.

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Investment Style contd

• Time. Speaking of the long term, time is another
  important element of your investing profile. How
  much time do you want to spend on investing? How
  active do you want to be in the management of
  your money? Do you want to spend 15 minutes a
  year on it? Then maybe you should consider hiring
  the services of the portfolio manager, who will
  watch over your investment like a hen watches
  over her eggs till they hatch well. We at Hidalgo
  believe we are ready to invest your capital in
  the equity market and watch it grow.

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Analyzing Stocks

• Introduction
• Investing, like most other things, requires that
  you have a general philosophy about how to do
  things in order to avoid careless errors. Would
  you make a soufflé without a recipe? Would you
  play cello in the London Philharmonic Orchestra
  without sheet music? Would you aim a shuffleboard
  disk without figuring out whether you're trying
  to knock off your own color or your opponent's?
  We hope not. And while investing is not nearly as
  difficult as these other challenges (especially
  the soufflé), you certainly need a considered
  plan before investing your hard-earned savings.
• Fundamental Analysis - Buying a Business (Value,
  Growth, Income, GARP, Quality)
• Many people rightly believe that when you buy a
  share of stock you are buying a proportional
  share in a business. As a consequence, to figure
  out how much the stock is worth, you should
  determine how much the business is worth.
  Investors generally do this by assessing the
  company's financials in terms of per-share values
  in order to calculate how much the proportional
  share of the business is worth. This is known as
  "fundamental" analysis by some, and most who use
  it view it as the only kind of rational stock
  analysis.
• Although analyzing a business might seem like a
  straightforward activity, there are many flavors
  of fundamental analysis. Investors often create
  oppositions and subcategories in order to better
  understand their specific investing philosophy.
  In the end, most investors come up with an
  approach that is a blend of a number of different
  approaches. Many of the distinctions are more
  academic inventions than actual practical
  differences. For instance, value and growth have
  been codified by economists who study the stock
  market even though market practitioners do not
  find these labels to be quite as useful. In the
  following descriptions, we will focus on what
  most investors mean when they use these labels,
  although you always have to be careful to
  double-check what someone using them really
  means.
• Value. A cynic, as the saying goes, is someone
  who knows the price of everything and the value
  of nothing. An investor's purpose, though, should
  be to know both the price and the value of a
  company's stock. The goal of the value investor
  is to purchase companies at a large discount to
  their intrinsic value - what the business would
  be worth if it were sold tomorrow. In a sense,
  all investors are "value" investors - they want
  to buy a stock that is worth more than what they
  paid. Typically those who describe themselves as
  value investors are focused on the liquidation
  value of a company, or what it might be worth if
  all of its assets were sold tomorrow. However,
  value can be a very confusing label as the idea
  of intrinsic value is not specifically limited to
  the notion of liquidation value. Novices should
  understand that although most value investors
  believe in certain things, not all who use the
  word "value" mean the same thing.

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Analyzing Stocks contd

• The person viewed as providing the foundation for
  modern value investing is Benjamin Graham, whose
  1934 book Security Analysis (co-written with
  David Dodd) is still widely used today. Other
  investors viewed as serious practitioners of the
  value approach include Sir John Templeton and
  Michael Price. These value investors tend to have
  very strict, absolute rules governing how they
  purchase a company's stock. These rules are
  usually based on relationships between the
  current market price of the company and certain
  business fundamentals. Some examples include
• Price/earnings ratios (P/E) below a certain
  absolute limit
• Dividend yields above a certain absolute limit
• Book value per share at a certain level relative
  to the share price
• Total sales at a certain level relative to the
  company's market capitalization, or market value
• Growth. Growth investing is the idea that you
  should buy stock in companies whose potential for
  growth in sales and earnings is excellent. Growth
  investors tend to focus more on the company's
  value as an ongoing concern. Many plan to hold
  these stocks for long periods of time, although
  this is not always the case. At a certain point,
  "growth" as a label is as dysfunctional as
  "value," given that very few people want to buy
  companies that are not growing. The concept of
  growth investing crystallized in the 1940s and
  the 1950s with the work of T. Rowe Price, who
  founded the mutual fund company of the same name,
  and Phil Fisher, who wrote one of the most
  significant investment books ever written, Common
  Stocks and Uncommon Profits.
• Growth investors look at the underlying quality
  of the business and the rate at which it is
  growing in order to analyze whether to buy it.
  Excited by new companies, new industries, and new
  markets, growth investors normally buy companies
  that they believe are capable of increasing
  sales, earnings, and other important business
  metrics by a minimum amount each year. Growth is
  often discussed in opposition to value, but
  sometimes the lines between the two approaches
  become quite fuzzy in practice.
• Income. Although today common stocks are widely
  purchased by people who expect the shares to
  increase in value, there are still many people
  who buy stocks primarily because of the stream of
  dividends they generate. Called income investors,
  these individuals often entirely forego companies
  whose shares have the possibility of capital
  appreciation for high-yielding dividend-paying
  companies in slow-growth industries. These
  investors focus on companies that pay high
  dividends like utilities and real estate
  investment trusts (REITs), although many times
  they may invest in companies undergoing
  significant business problems whose share prices
  have sunk so low that the dividend yield is
  consequently very high.

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GARP

• GARP. GARP, aside from being the name of the
  title character to John Irving's The World
  According to Garp, is an acronym for growth at a
  reasonable price. The world according to GARP
  investors combines the value and growth
  approaches and adds a numerical slant.
  Practitioners look for companies with solid
  growth prospects and current share prices that do
  not reflect the intrinsic value of the business,
  getting a "double play" as earnings increase and
  the price/earnings (P/E) ratios at which those
  earnings are valued increase as well. Peter
  Lynch, who may be familiar to you through his
  starring role in Fidelity Investments commercials
  with Lily Tomlin and Don Rickles, is GARP's most
  famous practitioner.
• One of the most common GARP approaches is to buy
  stocks when the P/E ratio is lower than the rate
  at which earnings per share can grow in the
  future. As the company's earnings per share grow,
  the P/E of the company will fall if the share
  price remains constant. Since fast-growing
  companies normally can sustain high P/Es, the
  GARP investor is buying a company that will be
  cheap tomorrow if the growth occurs as expected.
  If the growth does not come, however, the GARP
  investor's perceived bargain can disappear very
  quickly.
• Because GARP presents so many opportunities to
  focus just on numbers instead of looking at the
  business, many GARP approaches, like the nearly
  ubiquitous PEG ratio and Jim O'Shaughnessy's work
  in What Works on Wall Street are really hybrids
  of fundamental analysis and another type of
  analysis -- quantitative analysis.

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Quality

• Quality. Most investors today use a hybrid of
  value, growth, and GARP approaches. These
  investors are looking for high-quality businesses
  selling for "reasonable" prices. Although they do
  not have any shorthand rules for what kind of
  numerical relationships there should be between
  the share price and business fundamentals, they
  do share a similar philosophy of looking at the
  company's valuation and at the inherent quality
  of the company as measured both quantitatively by
  concepts like Return on Equity (ROE) and
  qualitatively by the competence of management.
  Many of them describe themselves as value
  investors, although they concentrate much more on
  the value of the company as an ongoing concern
  rather than on liquidation value.
• Warren Buffett of Berkshire Hathaway is probably
  the most famous practitioner of this approach. He
  studied under Benjamin Graham at Columbia
  Business School but was eventually swayed by his
  partner, Charlie Munger, to also pay attention to
  Phil Fisher's message of growth and quality.
• Arguments Against Fundamental Analysis. Those who
  do not use fundamental analysis have two major
  arguments against it. The first is that they
  believe that this type of investing is based on
  exactly the kind of information that all major
  participants in publicly traded markets already
  know, so therefore it can provide no real
  advantage. If you cannot get a leg up by doing
  all of this fundamental work understanding the
  business, why bother? The second is that much of
  the fundamental information is "fuzzy" or
  "squishy," meaning that it is often up to the
  person looking at it to interpret its
  significance. Although gifted individuals can
  succeed, this group reasons, the average person
  would be better served by not paying attention to
  this kind of information.

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Quantitative Analysis

• Quantitative Analysis - Buying the Numbers
• Pure quantitative analysts look only at numbers
  with almost no regard for the underlying
  business. The more you find yourself talking
  about numbers, the more likely you are to be
  using a purely quantitative approach. Although
  even fundamental analysis requires some numerical
  inputs, the primary concern is always the
  underlying business, focusing on things like
  management's expertise, the competitive
  environment, the market potential for new
  products, and the like. Quantitative analysts
  view these things as subjective judgments, and
  instead focus on the incontrovertible objective
  data that can be analyzed.
• One of the principal minds behind fundamental
  analysis, Benjamin Graham, was also one of the
  original proponents of this trend. While running
  the Graham-Newman partnership, Graham exhorted
  his analysts to never talk to management when
  analyzing a company and focus completely on the
  numbers, as management could always lead one
  astray.
• In recent years as computers have been used to do
  a lot of number crunching, many "quants," as they
  like to call themselves, have gone completely
  native and will only buy and sell companies on a
  purely quantitative basis, without regard for the
  actual business or the current valuation - a
  radical departure from fundamental analysis.
  "Quants" will often mix in ideas like a stock's
  relative strength, a measure of how well the
  stock has performed relative to the market as a
  whole. Many investors believe that if they just
  find the right kinds of numbers, they can always
  find winning investments. D. E. Shaw is widely
  viewed as the current King of the Quants, using
  sophisticated mathematical algorithms to find
  minute price discrepancies in the markets. His
  partnership sometimes accounts for as much as 50
  of the trading volume on the New York Stock
  Exchange in a single day.

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Company size

• Company Size. Some investors purposefully narrow
  their range of investments to only companies of a
  certain size, measured either by market
  capitalization or by revenues. The most common
  way to do this is to break up companies by market
  capitalization and call them micro-caps,
  small-caps, mid-caps, and large-caps, with "cap"
  being short for "capitalization." Different-size
  companies have shown different returns over time,
  with the returns being higher the smaller the
  company. Others believe that because a company's
  market capitalization is as much a factor of the
  market's excitement about the company as it is
  the size, revenues are a much better way to break
  up the company universe. Although there is no set
  breakdown used by all investors, most
  distinctions look something like this
• MICRO - 100 million or lessSMALL - 100 million
  to 500 millionMID - 500 million to 5
  billionLARGE - 5 billion or more
• The majority of publicly traded companies fall in
  the micro or small categories. Some statisticians
  believe that the perceived outperformance of
  these smaller companies may have more to do with
  "survivor" bias than actual superiority, as many
  of the databases used to do this performance
  testing routinely expunged bankrupt companies
  until pretty recently. Since smaller companies
  have higher rates of bankruptcy, excluding this
  factor helps "juice" up their historical returns
  as a result. However, this factor is still being
  debated.

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Screen-Based Investing

• Screen-Based Investing. Many quantitative
  analysts use "screens" to select their
  investments, meaning that they use a number of
  quantitative criteria and examine only the
  companies that meet these criteria. As the use of
  computers has become widespread, this approach
  has increased in popularity because it is easy to
  do. Screens can look at any number of factors
  about a company's business or its stock over many
  time periods.
• While some investors use screens to generate
  ideas and then apply fundamental analysis to
  assess those specific ideas, others view screens
  as "mechanical models" and buy and sell purely
  based on what comes up on the screen. These
  investors claim that using the screen removes
  emotions from the investing process. (Those who
  do not use screens would counter that using a
  screen mechanically also removes most of the
  intelligence from the process.) One of the
  proponents of using screens as a starting point
  is Eric Ryback, and one of the most famous
  advocates of screens as a mechanical system is
  James O'Shaughnessy.

22
Momentum

• Momentum. Momentum investors look for companies
  that are not just doing well, but that are flying
  high enough to get nose bleeds. "Well" is defined
  as either relative to what investors were
  expecting or relative to all public companies as
  a whole. Momentum companies often routinely beat
  analyst estimates for earnings per share or
  revenues or have high quarterly and annual
  earnings and sales growth relative to all other
  companies, particularly when the rate of this
  growth is increasing every quarter. This kind of
  growth is viewed as a sign that things are
  really, really good for the company. High
  relative strength is often a category in momentum
  screens, as these investors want to buy stocks
  that have outperformed all other stocks over the
  past few months.

23
Arguments against

• Arguments Against Quantitative Analysis. Because
  quantitative analysis hinges on screens that
  anyone can use, as computing horsepower becomes
  cheaper and cheaper many of the pricing
  inefficiencies quantitative analysis finds are
  wiped out soon after they are discovered. If a
  particular screen has generated 40 returns per
  year and becomes widely known, and if lots of
  money flows into the companies that the screen
  identifies, the returns will start to suffer.
• As "fuzzy" as fundamental analysis might be,
  there are often times that knowing even a little
  about the company you are buying can help a lot.
  For instance, if you are using a
  high-relative-strength screen, you should always
  check and see if the companies you find have
  risen in price because of a merger or an
  acquisition. If this is the case, then the price
  will probably stay right where it is, even if the
  "screen" you used to pick this company has
  generated high annual returns in the past.

24
Technical Analysis

• Technical Analysis - Buying the Chart
• What would you do if you truly believed that all
  information about publicly traded companies was
  efficiently distributed and that nobody could get
  an edge on anyone else by either understanding
  the business or analyzing the numbers? You might
  consider simply giving up on beating the market's
  returns by buying an index fund. Some investors
  have taken an alternate route, attempting to
  create a set of tools that might tell them what
  other investors thought about a stock at any
  given time, particularly looking for the
  footprints of large institutional investors that
  tend to cause the most extreme price changes.
  Investors who focus on this kind of psychological
  information call themselves technical analysts
  and believe that charts can sometimes provide
  insight into the psychology surrounding a stock.
  Although there are plenty of pure chartists, some
  investors just use charts to time investments
  after looking at them from a fundamental or
  quantitative perspective.

25
Arguments Against

• Arguments Against Technical Analysis. Technical
  analysis assumes that certain chart formations
  can indicate market psychology about either an
  individual stock or the market as a whole at key
  points. However, most of the statistical work
  done by academics to determine whether the chart
  patterns are actually predictive has been
  inconclusive at best, as detailed in Burton
  Malkiel's A Random Walk Down Wall Street. Much of
  the faith in technical analysis hinges on
  anecdotal experience, not any kind of long-term
  statistical evidence, unlike certain quantitative
  and fundamental methodologies that have been
  shown in many instances to be pretty predictive.
  Critics of technical analysis feel that it is
  basically as useful as reading tea leaves.

26
Trading - Doing What Works

• Trading - Doing What Works
• As trading commissions have fallen and more and
  more people have gained access to instantaneous
  data about stock prices, trading has become more
  and more popular, and very likely much too
  popular, somewhat like Madonna or Beanie Babies.
  Traders normally use a hodgepodge of fundamental,
  quantitative, and technical techniques with a
  short-term orientation. Trading tends to be a
  highly charged experience where one looks to make
  a few points from each trade. Although
  widespread, trading is far from a systematized,
  philosophical body of knowledge that is easily
  explained in a few paragraphs.
• Many novice investors, lulled by the apparently
  easy casino-like gains possible in trading, tend
  to lose a lot of money before they realize that
  when there are thousands of other traders out
  there looking for the same things, it is often
  those who are fastest, have the most experience,
  and own the best equipment that make money -
  normally not the people just starting out. All
  traders emphasize that successful trading
  requires careful attention, discipline, and a lot
  of work, so anyone who thinks that he can use a
  Quotrek in between meetings to make a fortune
  might want to reconsider.

27
Aspect of Trading

• Arguments Against Trading. Trading is clearly a
  time-consuming adventure. Although there are a
  number of very famous and successful traders,
  many individuals ignore the fact that these
  traders are well equipped to trade and have all
  day to do so. Given the time and effort most
  successful traders put into their trading, the
  potential for amateurs to reap the same rewards
  with less effort and fewer resources is very low.
  With so much money competing in the one-day to
  one-year investment time-frame, an individual
  with a minimal amount of time will probably be
  more successful finding businesses to own for the
  long term and not trying to engage in
  high-octane, almost gambling-like behavior

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The Hidalgos Glossary

• Book Value. The current value of an asset on a
  company's balance sheet according to its
  accounting conventions. The shareholders' equity
  on a company's balance sheet is the book value
  for that entire company. Many times when
  investors refer to book value, they actually mean
  book value per share, which is the shareholder's
  equity (or book value) divided by the number of
  shares outstanding. As the book value is
  theoretically what a company could be sold for
  (liquidation value), this book value number is
  sometimes used as a rough guide as to whether or
  not the shares are undervalued.
• Capital Appreciation. One of the two components
  of total return, capital appreciation is how much
  the underlying value of a security has increased.
  If you bought a stock at 10 and it has risen to
  13, you have enjoyed a 30 return from the
  appreciation of the original capital you
  invested. Dividend yield is the other component
  of total return.
• Dividend Yield. A ratio of a company's annual
  cash dividends divided by its current stock price
  expressed in the form of aage. To get the
  expected annual cash dividend payment, take the
  next expected quarterly dividend payment and
  multiply that by four. For instance, if a 10
  stock is expected to pay a 25 cent quarterly
  dividend next quarter, you just multiple 25 cents
  by 4 to get 1 and then divide this by 10 to get
  a dividend yield of 10.
• Dividend Yield Ann. Div. P rice 0.25 4 10
  0.10 10
• Many newspapers and online quote services will
  include dividend yield as one of the variables.
  If you are uncertain whether the current quoted
  dividend yield reflects a recent increase in the
  dividend a company may have made, you can call
  the company and ask them what the dividend per
  share they expect to pay next quarter will be.

29
EPS

• Earnings Per Share (EPS). Earnings, also known as
  net income or net profit, is the money that is
  left over after a company pays all of its bills.
  For many investors, earnings are the most
  important factor in analyzing a company. To allow
  for apples-to-apples comparisons, those who look
  at earnings use earnings per share (EPS).
• You calculate the earnings per share by dividing
  the dollar amount of the earnings a company
  reports over the past 12 months by the number of
  shares it currently has outstanding. Thus, if XYZ
  Corp. has 1 million shares outstanding and has
  earned 1 million in the past 12 months, it has
  an EPS of 1.00.
• 1,000,000, 1,000,000 shares 1.00 in earnings
  per share (EPS)

30
Market Cap

• Market Capitalization. The current market value
  of all of a company's shares outstanding. To
  calculate market value, you take the number of
  shares outstanding and multiply them by the
  current price of each share. You can find
  information about shares outstanding from the
  company's last quarterly report or any online
  quote service.
• For instance, if a company has 10 million shares
  outstanding and trades at 13 per share, the
  market capitalization is 130 million.
• Market Cap. Shares Outstanding Share Price10
  million 13 130 million

31
P/E

• Price/Earnings Ratio (P/E). Earnings per share
  alone mean absolutely nothing. In order to get a
  sense of how expensive or cheap a stock is, you
  have to look at those earnings relative to the
  stock price. To do this, most investors employ
  the price/earnings (P/E) ratio. The P/E ratio
  takes the stock price and divides it by the last
  four quarters' worth of earnings. If XYZ Corp. is
  currently trading at 15 a share with 1.00 of
  earnings per share (EPS), it would have a P/E of
  15.
• 15 share price 1.00 in trailing EPS 15 P/E

32
Relative Strength

• Relative strength, also known as relative price
  strength, rates the performance of a stock versus
  the performance of the market as a whole over a
  given time period. The rating system gives a
  numerical grade to the performance of a stock
  over a given period, normally the past 12 months.
  Thus, relative strength is a momentum indicator.
• The most popular form of relative strength
  ratings are those published in Investor's
  Business Daily, which go from 1 to 99. A relative
  strength of 95, for example, indicates a
  wonderful stock, one that has outperformed 95 of
  all other Kenyan stocks over the past year.i.e
  BBK, Equity. However, given that relative
  strength is only a mathematical relationship
  between the stock's performance and an index's
  performance, many others have created their own
  relative strength measures.

33
Glosscontd

• Revenues. Also known as sales, revenues are how
  much the company has sold over a given period.
  Annual revenues would be the sales for a given
  year, whereas quarterly revenues would be the
  sales for a given quarter.
• Sales. Also known as revenues, sales are
  literally how much the company has sold over a
  given period. Annual sales would be the sales for
  a given year, whereas quarterly sales would be
  the sales for a given quarter.
• Utilities. A business that provides a service
  essential to almost everyone is called a utility.
  These businesses are almost always under some
  form of regulation by the government and normally
  have a monopoly position in a certain region.
  Electric companies, natural gas providers, and
  local phone companies are often referred to as
  utilities.
• Volume. The number of shares traded on a given
  day is known as the volume. Many investors look
  at volume over a month or a year to come up with
  average daily volume. Market watchers will say a
  company has traded at a certain number of times
  the average daily volume, giving the investor a
  sense of how active the stock was on a certain
  day relative to previous days. When major news is
  announced, a stock can trade as much as 20 or 30
  times its average daily volume, particularly if
  the average daily volume is very low.
• The average number of shares traded gives an
  investor an idea of a company's liquidity - how
  easy it is to buy and sell a particular stock.
  Highly liquid stocks trade easily in large
  batches with low transaction costs. Illiquid
  stocks trade infrequently and large sales often
  cause the price to rise or fall dramatically.
  Illiquid stocks on the NSE also tend to carry the
  largest spreads, the difference between the
  buying price and the selling price.

34
Trust your Portfolio Managerin times of the bear
market

• HGC.

 
35
HIDALGOS ADAGE

• "Buy at the time of maximum pessimism and Sell
  at the time of maximum optimism" The scenario of
  the big man and the small fellow.

36
Why INVEST with HIDALGO

• A company dedicated to excellence and the
  decoding of the Kenyan Financial and Equity
  markets,
• Has a team of professionals in the fields of law,
  finance, strategic planning and media.
• Hidalgo believes in telling you as it is, cutting
  through all the information overload and telling
  you the basic factor- the odds are with you or
  not.
• We at Hidalgo believe that our Portfolio
  management strategies, research and data analysis
  techniques are different from the every day data
  analysis management that you do receive from
  other companies.

37
How Hidalgo Works

• Earning from your investment in the equity market
  is three fold-
• The dividend aspect every once a year
• The aspect of speculation on every settlement
  day
• The aspect of the Initial Public Offers IPOs

38
Dividend Aspect

• The dividend is such an important factor in the
  success of many stocks that you could hardly go
  wrong by making an entire portfolio of companies
  that have raised their dividends for 10 or 20
  years in a row. Companies that don't pay
  dividends have a sorry history of blowing the
  money on a string of stupid diversifications."
• You can get a reliable source of income from
  dividends around the year. How? By buying only a
  handful of stocks with different payment time
  slots, you can space your payments so you get
  extra income every month throughout the year.
• We at Hidalgo believe that more attention will be
  paid to dividends and current earnings and less
  to growth. By and large, companies that are
  paying dividends have to have earnings. They
  can't do that with smoke and mirrors." Jeremy
  Siegel, professor of finance at Wharton and
  author of the best-seller Stocks For the Long
  Run.
• Earnings are very difficult to estimate cash
  dividends are not. Fifty years ago, people bought
  stocks for dividends they did not buy them for
  earnings. And one of the problems we did not have
  back then is earnings manipulations they were
  not very important because nobody cared."
• You can't always trust earnings. We saw how
  companies like Uchumi, Sasanet group, Enron,
  WorldCom and Global Crossing cooked the books.
  Investors were destroyed. But did you know that
  old stalwarts like Lucent Technologies and Xerox
  acted inappropriately, too? Lucent claimed an
  extra 600 million in revenues that it hadn't
  earned. Xerox announced revenues 3 billion
  higher than it actually generated from 1997
  through 2000. Unlike a company's earnings,
  dividends can't be manipulated.
• When the tax on capital gains was slashed from
  50 to 20 in 1981, it set the stage for an
  expanding economy and roaring bull market. With
  the tax reduction on dividends put in place by
  the Bush administration, the same surging cycle
  of prosperity could be set in motion again.
  Investors could demand MORE companies pay
  dividends once they see how much extra money
  they'll keep in their pockets. In the Kenya
  scenario, tax on capital gains from the equity
  market are not levied, thus the stage is ready
  and waiting for the savvy investor to take the
  advantage for his benefit.
• Earnings from dividends is pretty straight
  forward and has no manipulations at all. Get the
  right information from your portfolio manager and
  organise your capital for the investment at the
  right time.
• Thus, talk to us at Hidalgo.

39
The Speculation Aspect

• Speculation basically means taking advantage of
  the current situations to your economic gain.
• To be a successful speculator-
• You will need a minimum of Kshs. 50,000, to be
  able to break even and make some profits every
  settlement day,
• Your dosage of risk tolerance will need to be
  pretty high, because a lot of money is made and
  lost when the market is really volatile. A good
  example is when the Kenyan market went on a
  meltdown when the news of Embakasis MP
  assassination reached the newsrooms and the stock
  market prices began going down that the trading
  process was stopped for 15 minutes. During this
  period, there was a lot of supply of shares on
  most counters and no demand. The supply glut was
  occasioned by the panic or fear of the retail
  investors need to sell and save his investment
  whilst the greed or the smartness of the
  corporate investor, told him to buy large and
  off-set the same the next day to the same
  retailer but at premium prices. If the retail
  investor had the services of the portfolio
  manager, then he would have made some good
  profits, based on sound advice he would have been
  given.
• As an investor in the money and equity markets,
  you will need the services of a portfolio
  manager.

40
THE IPO ASPECT

• Initial Public Offers essentially signify the
  transition of a particular private or family or
  state owned company going public through the
  issuance of its shares to the public at a
  discounted price as compared to its true market
  value.
• One can greatly benefit twofold-
• By the purchase of the shares in the secondary
  market the already listed shares at lower
  prices because everyone else will be offloading
  their holdings to be able to purchase the IPO
  thus there will be a supply glut and no matching
  demand in the market thus, shares prices will
  drop. Purchase of these stocks is very lucrative
  because the price will simultaneously rise with
  the with the commencement of the IPO trading on
  the market because the demand will suddenly match
  the initial supply and outstrip it thus raising
  the price of the stocks. Precedence of previous
  IPOs like Kengen, Eveready, Access Kenya have
  indicated and shown the price declines of various
  stocks prior to the offering and the immediate
  surge in the same once the IPO stock starts
  trading at the bourse. So, if one is well
  prepared, then you can benefit from the
  fluctuation in the secondary market due to the
  IPO and also benefit from the IPO itself once it
  starts trading and it attains its true market
  value as clearly shown by the KENGEN offering.

41
SERVICES OFFERD BY HIDALGO GROUP OF COMPANIES.

• SERVICES OFFERED THROUGH HIDALGOS PORTFOLIO
  MANAGEMENT-
• GOLD
• SILVER
• BRONZE
• GOLD SERVICE-
• Requirements-
• Minimum Investment Capital of Kshs. 500,000
• Benefits-
• Weekly circulation of your funds in the equity
  market in stock counters with maximum returns to
  maximise on your returns at the behest of
  Hidalgos portfolio manager.
• Free Stock Market alerts,
• Free fortnight statements,
• Free quarterly Hidalgo Finance Magazine,
• Hidalgo Staff visit you at your office for
  consultations.
• Charges-
• The charges levied will be for office
  facilitation of Kshs. 5,000 per month.

42
Services Offered contd.

• SILVER SERVICE-
• Requirements-
• Minimum Investment Capital of Kshs. 200,000
• Benefits-
• Free Stock Market alerts,
• Free fortnight statements,
• Free quarterly Hidalgo Finance Magazine,
• Weekly circulation of your funds in the equity
  market in stock counters with maximum returns to
  maximise on your returns, at the behest of the
  Hidalgos portfolio manager.
• Charges-
• The charges levied will be for office
  facilitation of Kshs. 2,000 per month.

43
Services Offered contd

• BRONZE SERVICE-
• Requirements-
• Minimum Investment Capital of Kshs. 50,000.
• Benefits-
• Free Stock Market alerts,
• Free fortnight statements,
• Free quarterly Hidalgo Finance Magazine,
• Adequate circulation of your funds in the equity
  market in stock counters with maximum returns to
  maximise on your returns, at the behest of
  Hidalgos portfolio manager.
• Charges-
• The charges levied will be for office
  facilitation of Kshs. 1,000 per month.

44
White Service

• WHITE SERVICE
• This kind of service will be available to all
  others below Kshs. 50,000, in terms of capital
  strength, as compared to the aforementioned
  services. This kind of service will not attract
  any benefit other than constant and productive
  circulation of your funds, as this will more or
  less be a long term kind of investment and it
  will attract no charges.

45
CONCLUSION

• Invest wisely,
• Strategise well,
• Dont listen to hearsay from people who have not
  tried out what they are preventing you from
  doing,
• Use the little you have to grow your asset base,
  to be able to handle your liabilities and
  expenses.
• Spend what you have to make more.
• Dont let your liability and expense column be
  larger than your asset base.
• Yours truly,
• Steve Biko,
• C.E.O.
• HIDALGO GROUP OF COMPANIES.