Beating the Stock Market at Its Own Game

Published on 13th November 2007

In Kenya, the general elections are here with us and investors are very jittery. For the last two months, the market index has been on a downward trend, losing over 600 points. The Safaricom IPO scheduled to open on 3rd December has  killed several counters as investors cash out in preparation for the ‘mother of all IPOs' as the Kenya's finance minister would say. Many investors are undecided whether to hold on to their investments or leave the market until next year when all has calmed down.

In the midst of this market downturn, we all have the same gut check. Will  you be comfortable with another significant deterioration of your wealth on the stock market? Will you leave the market for peace of mind? There is no need for any investor to leave the market now. If an investor gets out and the market goes further down (this is quite possible,) he may not get back in as soon as the trends turn up-ward, due to fear of loss, hence losing the opportunity to buy low.  Furthermore, the transaction costs of getting out and in will mean that his value of investment goes down.

While no one wishes to lose money, stock market cycles should not be considered as ways of losing money.In  stock markets, nothing is permanent. You can make a huge gain in your portfolio today and lose it tomorrow. The only thing one needs to know is whether the reduction in their investment will lead to a permanent loss or a market correction. As long as the company one has invested in engages in business whose value has not deteriorated, any loss will be regained in time as the gap between price and value inevitably narrows.

A market like the NSE has many speculators who move with the trend without looking at the underlying value of a company before investing in it. Although such investors are necessary and beneficial to the market, they can greatly affect the market trends when they leave or enter the bourse en masse.

At the moment, speculators are leaving the NSE due to the uncertainty they associate with the coming general elections and also in preparation for the Safaricom IPO. This should not be a reason for you to leave too. Think about it! If you leave the market when everyone is leaving and come back when everyone is, how do you expect to gain from the market? An investor must be willing to go against the herd. Simply buy low when everyone is selling and sell high when everyone is buying.

Parting with investment when it is at its peak is not always easy. Just after the famous KenGen IPO, the share price which had been selling at Ksh.11.50 during the IPO rose to a high of Ksh.40. Many investors held on to their shares in anticipation that it would rise even further.To their disappointment, it did not. Instead, the share dropped drastically to Ksh.17 and many lost the opportunity to sell high. One should therefore be ready to sell when they deem a particular stock to be very valuable. Setting a margin on when one will sell a share is very important. Similarly, a lower limit should be placed on when to sell a stock if it drops in value. Some investors have placed a 25-7 percent limit on their portfolios.They will consider selling a stock once it rises above 25 percent of their buying price and sell it if it drops beyond 7 percent of the buying price.

Learning to read the business and not the stock is very essential for an investor. Just because the value of a stock is going down on the market does not mean that the company is doing badly. There are other factors that may make the stock price to drop such as investors disposing the stock in favor of other investments that they deem favorable. Understanding the business you are buying in will help an investor a great deal to know when to buy or sell. For example, if you know that a certain company has been having management problems and has overhauled the manager for other good managers, you can buy their stock in anticipation that the new team will make a great improvement on the company’s performance.


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