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Joy and pain of the stock market

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A broker studies the stock exchange board during trading

A broker studies the stock exchange board during trading recently. PHOTO BY STEPHEN WANDERA 

By James Abola

Posted  Tuesday, January 28  2014 at  02:00

In Summary

If you wish to invest in the stock market, make sure it is a long-term plan.

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In the past few days my friend Damalie (second name withheld) has been bobbing with excitement like a kid in a bouncing castle.

The cause of Damalie’s delight is the discovery she made in January 2014 that the share price of Safaricom had risen above Ksh11.60.

The story of Safaricom shares goes back to 2008, when the company listed on the Nairobi Stock Exchange. Already a big telecom company by then, investors in both Uganda and Kenya expected to gain a lot from the appreciation of the share price once it started to trade on the stock market.

Many of the investors, or speculators, were relying on the performance of the shares of earlier listed companies such as Kengen in Kenya and Stanbic Bank in Uganda whose prices had doubled and tripled respectively.

Safaricom listed at Ksh5 but instead of going north, the share price rapidly headed south. The timing of the listing of Safaricom played a major part in the depreciation of its price That was the time when the financial crisis was coming to light and investors were dumping stocks to retreat to more stable assets.

The smaller investors or speculators were seized by fear which grew stronger with the further fall of the share price. The selling out of fear only drove the share price further down. At one point in 2011, it was as low as Ksh2.95.
A few investors like Damalie hang in by their fingernails, so to speak and finally in November 2013, Safaricom doubled its offer price selling at Ksh11.60. Since then, the price has stayed high. The performance of Safaricom shares offers excellent lessons for new investors. Here are some of the lessons.

Share prices fluctuate
One of the things that any good stock broker will tell a client is that share prices can go up or down. Any person who approaches investing in shares with the attitude of “I can’t go wrong” is a fool.

So many factors can affect the performance of a share. It is therefore good for the health of your heart as well as your pocket to approach investing in shares with the knowledge that the high price today could be gone by tomorrow and vice versa.

Think medium to long-term
The other lesson Safaricom teach us is that investing in shares require a medium to long term outlook. If you intend to profit from shares you should be willing to hold a particular stock for three years or more. The reason is that despite the up and down movement of share prices over a longer time frame, the overall trend of most stocks points upwards. In the case of Safaricom, the upward movement only became real after five years.

You realise gains or losses when you sell
The third lesson we can pick from Safaricom is that an investor concretises their gains or losses when they sell. Many of the Safaricom investors lost money in 2008 because they sold even when the share price had fallen below the price at which they had bought. Most successful investors are very reluctant to sell at a loss. Someone may say why not sell a loss making stock and put the money on one that is gaining?

A little example will help to explain. Let us say you bought Safaricom at Ksh5 and when the price fell by 20 per cent you decided to sell getting Ksh4 per share. You put the money you got from the sale into another company that gained 20 per cent. So now we have Ksh4 times 1.2 which gives Ksh4.8 which is less than the Ksh5 you started with. The point here is that a loss of 20 per cent is not cancelled out by a gain of the same percentage.

Set an upper limit
My last lesson from Safaricom is that every investor must set an upper limit to their greed. When Damalie realised that the share price was going up she told me she would hold on until it got to Ksh20. She is now being swayed by the upward movement of the share price instead of setting a more objective target such as if double my money in five years I will be happy to sell.

The bonus lesson is this; with shares you make money when you buy and not when you sell. This means that when the price is high it is a bad time to buy.

James Abola is the Team Leader of Akamai Global, a business and finance consulting firm. Email: james.abola@akamaiglobal.co.uk