The Nairobi Securities Exchange has lost about 60% of its value since 2015, causing anxiety for investors. It is painful watching your portfolio value shrink by 20, 40, or 60%. Nevertheless, investing during market downturns is a proven means of maximizing returns. It is precisely during these painful times that we need to remember the following investing principles:
- From its inception, the stock market has been cyclic. Prices go up, and they go down. This is a fact. People who make money on the stock exchange utilize this fact–and they have the guts to act contrary to the crowd. You see, most “investors” buy when the market is up, and sell in panic when the market drops. This is the exact opposite of what the smart money does. Intelligent investors are loading up on stocks now.
- To avoid letting your emotions force you into a hasty decision, don’t just do something, sit there! Wait out the downturn. Do not sell–this will lock in your losses. Do not watch the prices dropping every day–you will only be stressed. Instead, consider this: if today, I offered you land in Kitengela, Karen, or along Thika Road at 2008 prices, what would do? Similarly, prices for some of the best stocks are now as low as they were 8 years ago. Consider the graph below, which shows the NSE20 index from 2008 onward. Of the five points labelled A through E, where would you have liked to purchase the bulk of your portfolio? While we cannot predict the market, we can definitely respond to it, by buying when prices are low, and selling when prices are high.
Of the five points labelled A through E, which ones present buying opportunities?
- Periodic buying during downturns makes more sense than trying to “time” the lowest point. If you purchase 1,000 shares of XYZ Company at Ksh 10, and the price drops to 5 Ksh, you have several options. You could hold your shares and wait for the price to climb back to Ksh 10. Alternatively, you could purchase another 1,000 shares at Ksh 5. You would now own 2,000 shares, with an average price of Ksh 7.50. Now, the market only has to climb from Ksh 5 to Ksh 7.50 for you to start making a profit, whereas before the price had to climb from Ksh 5 to 10.
In summary, do not let the negative sentiment during a market downturn force you to abandon investing. Understand that the market will eventually turn upwards. It’s a question of when, not if. And when it does, the happy investors will be the ones who took advantage of the market slump to buy quality stocks at cheap prices.