What market watchers miss in bull, bear dance

What you need to know:

As you prepare for corrections, you could be losing more than moving in.

An old friend called on me to catch up a week ago. Late last year, 2018, he had asked me for my prognosis on the Nairobi Securities Exchange (NSE) and I sounded like I was reading from the book of Lamentations. In my view, indicators from both the external and domestic environments suggested the bears still had ample room to maul the market further, at least in the short-term.

Last week, the 20 Share Index inched north of 3,000, the first time in about five months, and going by the market capitalisation, investor wealth had raked in around Sh300 billion since the year started. His verdict? The market was reassuringly clawing back from trough and, of course. I was dead wrong on this one.

2019 marks 11 years since I began investing at the NSE. I have seen heady optimism saddle the NSE 20-Share Index comfortably at 5,499 (March 2015) and I have seen a stampede out of the market plunge it to as low as 2,360 (March 2009).

Through this period, I have witnessed the Safaricom share fetch as low as Sh3.60 (after remaining stuck at Sh2.50 for many months since listing, much to the disenfranchisement of investors).

The stock closed Friday’s trade at Sh26.10. I have also seen National Bank’s share fetch a handsome Sh29; it closed Friday’s trade at Sh5.68.

My friend was, and still is, on a mission to do something I strongly advise against on matters stock market investment: timing the bottoming out of the market.

The context needed here is that whereas I had vouched for entering the market last year, when almost every day gave forth a new low and, therefore, room to average down one’s purchase price, his idea was to wait until the market signalled that it was at a tipping point and take a plunge.

They say you don't look a gift horse in the mouth and as far as my friend was concerned, that's precisely what I was asking him to do.

The market is capricious enough to remind one that only fools wait for the top dollar and as renowned investor, Peter Lynch, writes, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves”.

The market is a stranger to crystal balls and every investor should be wary of the lurking danger of misconstruing a Wicked Bear Trap for a bull-run that could warrant hopping onto at its nascent stages.

A wicked bear trap happens when a stock market begins ticking up after a tumble, attracts entry from the many keen not to miss the soaring prices bandwagon, only to resume its bearish path soon and leave most with their backs against the wall.

I tried my hand at timing the market's bottom out in 2009. By the start of that year, the NSE was showing signs of shrugging off the after-effects of 2008 bear run. The 20 Share closed Quarter Two 2009 at 3,294, up 17.4 percent from its close of First Quarter.

Like Pahom in Leo Tolstoy’s tragedy, How much land does a man need? I bought into the fad hook, line, and sinker, took all my pittance earnings and ploughed them into the market.

By the end of third quarter that year, the market was ceding ground again and the 20 Share Index was down, barely lifting above the 3,000 mark. In the market, supply kept rising, demand was not easy to come by and for the little I had scooped I kept haemorrhaging.

The market would pick again in first quarter of 2010, turbo charge through third quarter but by the end of the fourth it would be sagging yet again.

Such is the nature of the market, sometimes it can pull the rug from under one's feet and I have my share of lessons.

Undeniably, many of us would love the fizz witnessed at the NSE since the start of 2019 to gather more momentum in the coming months. Some would argue there's a compelling case to believe that should be the case — net outflows by foreign investors seem to be thinning out.

Whether my friend is right or wrong, however, is immaterial.

If he is right, that would be an unerring eye for a lucrative opportunity and it will be two thumbs up for him.

If not, I'll be the first to remind him the words of Edwin Lefevre in his book Reminiscence of a Stock Operator that "There's nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win".

To dare is the best caution, they say, and I like those who dare to time an animal as unpredictable as the equities market.