Before investing, you should know your purpose and the likely time in the future you may have need of the funds.
Bernard Baruch, known as “The Lone Wolf of Wall Street,” owned his own seat on the New York Stock Exchange by age 30 and became one of the country’s best known financiers by 1910.
While a master of his profession, Baruch had no illusions about the difficulties of successful stock market investing, saying, “The main purpose of the stock market is to make fools of as many men as possible.”
At the same time, there are thousands of individuals who buy and sell securities on the Nairobi Securities Exchange regularly and are successful. A profitable outcome is not the result of luck, but the application of a few simple principles derived from the experiences of millions of investors over countless stock market cycles.
While intelligence is an asset in any endeavour, a superior IQ is not a prerequisite of investment success. Everyone has the brainpower to follow the stock market. If you can make it through class five math, you can do it.
In our quest for success, we often overlook the most powerful tools available to us: time and the magic of compounding interest. Investing regularly, avoiding unnecessary financial risk, and letting your money work for you over a period of years and decades is a certain way to amass significant assets.
Before investing, you should know your purpose and the likely time in the future you may have need of the funds. If you are likely to need your investment returned within a few years, consider another investment; the stock market with its volatility provides no certainty that all of your capital will be available when you need it.
The idea of perception is important, especially in investing. As you gain more knowledge about investments – for example, how stocks are bought and sold, how much volatility (price change) is usually present, and the difficulty or ease of liquidating an investment – you are likely to consider stock investments to have less risk than you thought before making your first purchase.
As a consequence, your anxiety when investing is less intense, even though your risk tolerance remains unchanged because your perception of the risk has evolved.
The biggest obstacle to stock market profits is an inability to control one’s emotions and make logical decisions. In the short-term, the prices of companies reflect the combined emotions of the entire investment community.
When a majority of investors are worried about a company, its stock price is likely to decline. When a majority feels positive about the company’s future, its stock price tends to rise.
A person who feels negative about the market is called a “bear,” while their positive counterpart is called a “bull.” During market hours, the constant battle between the bulls and the bears is reflected in the constantly changing price of securities.
These short-term movements are driven by rumours, speculation and hopes – emotions – rather than logic and a systematic analysis of the company’s assets, management, and prospects.
When you buy a stock, you should have a good reason for doing so and an expectation of what the price will do if the reason is valid.
At the same time, you should establish the point at which you will liquidate your holdings, especially if your reason is proven invalid or if the stock doesn’t react as expected when your expectation has been met.
In other words, have an exit strategy before you buy the security and execute that strategy unemotionally. Before making your first investment, take time to learn the basics about the stock market and the individual securities composing the market.
There is an old adage: It is not a stock market, but a market of stocks. Unless you are purchasing an exchange traded fund (ETF), your focus will be on individual securities, rather than the market as a whole.
There are few times when every stock moves in the same direction; even when the averages fall by 10 points or more, the securities of some companies will go higher in price.
The popular way to manage risk is to diversify your exposure. Prudent investors own stocks of different companies in different industries, sometimes in different countries, with the expectation that a single bad event will not affect all of their holdings or will otherwise affect them to different degrees.
Stock investments have historically enjoyed a return significantly above other types investments while also proving easy liquidity, total visibility, and active regulation to ensure a level playing field for all.
Investing in the stock market is a great opportunity to build large asset value for those who are willing to be consistent savers, make the necessary investment in time and energy to gain experience, appropriately manage their risk, and are patient, allowing the magic of compounding to work for them.
The younger you begin your investing avocation, the greater the final results – just remember to walk before you begin to run.
Ndirangu Ngunjiri
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Note: The results are not exact but very close to the actual.
