Investing in Stocks 101: The importance of an Anchor Stock

Every so often I get questions from first-time NSE investors asking about which shares to buy, so when my younger sister approached me with numerous questions about opening a brokerage account, it did not catch me by surprise. After I reassured her that you can never be too young to start investing — perhaps we can cover this topic in a future insight — I posed to her the most important questions she needed to ask herself before making her first investment:  

1. What is her risk tolerance? 

2. What is her long-term goal? 

3. What company does she really love and believe in? 

4. How does the company’s balance sheet look? 

5. Does it pay a dividend? 

6. 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 very easy to come up with a new product to replace M-PESA.

As it is important for a first-time investor, I asked my younger sister to identify her 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 your entire portfolio around it. 

Here are some characteristics that best describe an anchor stock:

1. It’s a stock you will continue to top up forever and never sell. 

2. It is usually a large or mega-cap stock such as Safaricom or EABL meaning

that its stock price movement is not volatile, quite literally ‘anchoring’ your portfolio. 

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

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

Some of you already have anchor stocks but may not even 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;

1. 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. 

2. For every investment in the likes of Longhorn,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 as well as 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. 

3. Although it might sound counterintuitive to a risky strategy, it will actually 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. 

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 three things. First, open a CDS account with a custodian bank or stock brokerage firm. Secondly, fund the account and lastly, buy your first shares!.

Happy investing.

The author is the CEO of finance management firm Abojani Investment. You can reach him on Twitter@TheAbojani or at www.abojani.com