JSE Junior Market

I recently saw an article in one of the islands leading newspaper which was reviewing the top performing stocks for 2011. It brought out the point that I made several months ago that most of the best performing stocks were those that listed on the junior stock market over the last twelve months. Now this phenomenon is not uncommon throughout the world as stocks with smaller share capitals tend to have larger swings in their earnings per share and thus their market values also tend to be more volatile.

However, the point that most companies miss is that it is not the listing of the stock that increases the value but it is what goes hand in hand with it. Many owners of private companies do not want to get listed as they fear losing control of their companies. They are also not comfortable with having to report to the other shareholders. Unfortunately this often results in the situation where owners who are ready to retire have no one to pass the company onto and ultimately close the business. In order to have a successful business one has to think long term and especially beyond the life expectancy of the original owners. Companies do no get to be one hundred years or older by operating on a short term way of thinking.

As a business grows the complexities that go along with it also increase and it becomes harder for one person to understand all of the issues involved with the company. In addition the need for working capital i.e. the assets required to run the business, also increases and many single owners are unable to find the finance to expand the business. Listing on a stock exchange can help to raise the finance that a company so badly needs. It helps to pay down expensive debt but also provides much needed working capital. The companies that listed this year have obviously benefited from this as demonstrated by the improved earnings.

However, there is another benefit that companies often overlook when considering listing on the stock exchange. To be a listed company requires compliance with certain listing requirements as well as regular reporting of results. These requirements lead to the strengthening of systems of accounting which are needed to produce financial statements. Also when a company becomes accountable to other shareholders than more care is taken when making decisions as a duty of care is to be demonstrated. Once you strengthen the controls and systems in a company you actually improve its chance of success.

Many companies that simply listed on the junior stock exchange in order to get a tax break now find that they are more profitable than they expected. I always say that it is better to own a smaller part of a successful company than to own all of a struggling one. I think that this lesson is starting to be learned.