Two very different attitudes to ownership of shares by individuals are sharply in focus at the moment.
While private investors in Saudi Arabia are being encouraged to buy shares in Aramco, a very different approach is being adopted by Britain’s Labour Party in its election manifesto. In the case of Aramco, it is almost seen as a patriotic duty to support the IPO, and owning shares in the world’s most profitable company is also a powerful and compelling argument.
Meanwhile, Jeremy Corbyn, leader of the Labour Party, is talking about the state buying back shares in the organisation that was at the bowsprit of privatisations of state utilities and other assets all around the world. It’s easy to forget that the IPO of British Telecom in 1984 conceived by the Conservatives was considered revolutionary at the time. Not even in America, the cutting edge of capitalism, had such a move ever been contemplated.
An opportunity for all
The early privatisations of the 1980s and early 90s spawned a whole new generation of investors. Traditionally, only the preserve of a small minority, with most people putting their savings into building societies, mutual funds and government bonds, private share ownership has now become mainstream, and not just in the UK and the US.
Individuals all around the world can invest in a whole raft of utilities and other assets fundamental to a country’s proper functioning. In the UAE, shares in du and Etisalat enjoy a popular following and both are regarded as trophy investments by those that own them.
Trend spotting exercises
That said, a lot of investment decisions are made purely on momentum or fads (think dotcom and crypto). In the mid- and late-1990s, retail investors in the UK were even piling into shares offered in the IPOs of football clubs that were in vogue at the time. They ignored the fact that an offside flag, a referee’s whistle or a missed penalty could often be the difference between relegation from, or promotion to, the Premier League and its lucrative TV rights, and the financial impact caused by failure.
Indeed, the vast majority of individuals who bought shares in BT, British Gas and the other privatised utilities did so mainly because the media encouraged them to believe that share prices would only go one way. In the case of BT, they did, and I myself remember the thrill of being allotted shares and watching the share price rocket.
This, though, created a dangerous perception: the easy and swift profits on offer made people think they could make as much money buying shares as they could in a casino, and just as quickly, but without the risk.
One of the world’s most respected and most successful investors is Warren Buffett, who is known above all else for two things: firstly, know exactly what you are investing in; and second, be prepared to own shares for the long term if you want to maximise the chances of a good return. Unfortunately, the vast majority of private investors lack the skills and analytical tools to discern between a risky investment and a good opportunity.
This brought to my mind something else fundamentally important to the economic health of any nation: financial literacy.
Judging from conversations I have had with many people I consider to be commercially astute and worldly-wise, I’m not alone in finding it incredible that virtually no form of compulsory financial education exists in any school anywhere in the world. It is mandatory for schoolchildren to be taught about the various things that can be a danger to them as they enter adulthood, but being financially naive or irresponsible is not considered to be one of them.
A literate investor
Forget about knowing how to value a company, even the more basic things like mortgages, life insurance and pensions have to be learnt on the fly. It’s a glaring omission, when the damage caused by reckless spending, borrowing, investing and poor financial planning really can make money too tight to mention.
This has been known for some time, and many organisations all around the world have made noises about the need to develop and strengthen levels of financial education and literacy. Too often, however, too much of this has been talk, frequently designed to tick a CSR box, and has not been backed up by action.
A lot of the promotion of financial literacy is also led by volunteers. This is an issue that urgently needs to be addressed, especially as new technologies are changing the way money is lent, spent and invested, making it even harder for the uninitiated private investor to know what to do.
No single country seems to be taking the lead on this — so surely this is a huge opportunity for the UAE to grasp the nettle and build another pillar of the knowledge-based economy that forms such an important part of its vision. Who knows, the next Berkshire Hathaway could even be started here.
Archie Berens is Managing Director at Hanover M.E.