All markets like water experience highs and lows; short term as well as long term. Long term can be over a period five years (presidential cycle) while short term can range from pre-open session to the closing session in a typical day. Changes during these periods shape events and they could bring about bears and bulls or worse still corrections, crashes, busts or free-falls/slides. Whereas investors can be ready for certain occurrences, others are difficult to predict.

In the third week of March 2007, the market encountered the worst dip in a decade in what turned out to be a market correction. Investors attributed what had happened to all stock prices in Kenya on March 22, 2007 to the ‘Black Thursday’ (just as was experienced on October 24, 1929 in US market indices).The NSE 20 Share Index had lost close to 800 points in less than a month to settle at slightly above 4200. Consequently, investors panicked selling everything to avoid turning small losses into big ones. Fund managers, high net worth retail investors and corporate were buying more and more to average down on the counters they hold. Unfortunately, the more they bought, the lower the prices dropped. Majority of investors exited the market as the income investors absorbed all excess liquidity from the panic sellers.

As the index slowly retracts, no one knows how long it will take for the market to fully recover. However, the law of demand and supply determines how low or high a price goes. But taking an exclusive look at our equity market, another factor comes into play; most activity is retail driven. The major corporate investors are fund managers and few of them manage foreign portfolios.

The question is: Is it wise to sell now just in the name of cutting losses or hold? How long should one hold? First, it is important to note that investors can be categorized into different classes with three important considerations; investment objectives, risk class and time horizon.

The tough reality is that most investors are highly risk averse just as much as they want to reap maximum returns. As much as the equity market is the riskiest of all asset classes, they want to assume that the risk rate is at almost zero per cent. Most of them have either used up their small life savings or borrowed the money at double digit rates. If one's disposable income is not sufficient to cater for the loan repayment, then chances are that the investor will be forced to offload the shares they have in order to raise enough money to repay the loan.

It is very disappointing that up to now, Kenyan banks still give loans to their clients to trade in the equity market. In other countries such as the US where this practice (also called margin trading) is allowed, the transactions are fully administered by the broker. Both buying and selling are timely and an analyst is always involved. At such instances, fundamentals are very crucial since investing in a company whose Earnings Per Share (EPS) is too low or a Price to Earnings (PE) ratio is too high could cause sleepless nights to an investor.

Due to their liquidity constraints, placing stop loss order is an option if that is the only expected cash flow to be utilized in the loan repayment. If you have a good relationship with the banker, you could also consider rescheduling the loan so that it is paid over a longer period of time in smaller amounts. However, if the money is a long term saving, two options come to fore; hold on the investment until prices readjust or  use the averaging down technique.

For all other investors (both high net worth and corporate investors), averaging down is the best hedging technique. Consider an investor who buys 10,000 Kenya Airways shares at Ksh. 127.00 after estimating its value at Ksh. 139.00 based on the Dividend Discounting Method (DDM). You realize that fundamentals are not the prime price movers in the Kenyan market. Three months down the line, the price does not rise past its estimated value. Instead, it drops to Ksh. 96.00 and the investor still finds it a worthy buy and puts an additional order for 10,000 shares.

In less than 10 days, the price hits more than half its estimate value and the investor is contemplating what to do next. If liquidity is not a problem, a wise move would be buying an additional number of shares at Ksh.63. In the long run, if the investor buys 10,000 shares at Ksh. 63, he will have a total of 30,000 Kenya Airways shares bought at an average price of Ksh.95. In this case, the investor will not have to wait for the price to hit the initial price of Ksh. 127.

The fact is, every market has its bad days and well-monitored, deep troughs should always be accumulation phases. Let’s not let this opportunity pass just because we thought that the market was never going to recover.