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Ideas & Debate

Your ABC to buying stocks cheaper during the sell-offs

Nairobi Securities Exchange (NSE) trading floor
Nairobi Securities Exchange (NSE) trading floor earlier this year. The market looks vulnerable and this is probably the best time to put money to work. PHOTO | DIANA NGILA  

On Friday, the index slipped back into correction territory (shed 40 points) for the third time this year following a loss of confidence across the board. An important level at 2,700 was broken — and this is not a good sign.

As it stands, the market looks vulnerable and should the pessimism persist, it could spark yet another deep sell-off. Subsequently, more market swings could become prevalent.

But that said, there is more reason to be upbeat on stocks even as the market battles to stay optimistic.

Yes, though the sell-off may have knocked down 240 points off the index (some nine percent from its January peak), the more extreme oversold conditions could actually put the market back on track.

In short, this is the best time to put your money to work. And so today, I share three ways on how to use the present weakness as an opportunity to buy.

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First, focus on picking up quality names at compelling prices. Look to buy the dip. Remember the core view is take advantage of already good businesses taking hits as part of collateral damage. Though these names — with fortress balance sheets, stable cash flow and good management teams — could still be in for more weeks of pain, investors don’t have to run.

Sustainable move higher is possibly on the cards. To date, only the blue chips (as reported through the NSE 20 Share Index) have traded lower into losses.

Secondly, focus on names currently going through some form of transition — managerially, strategically and/or operationally. Some frightened investors could have overblown their concerns and become blinded to individual strengths.

The key is that they should be operating in a promising environment. The idea here is that a new focus always brings in a new sense of momentum and direction.

However, be careful with the companies that are “perennially bad actors” with negative outside influence and those that have lost their competitive advantage.

That makes it a good time to get ahead of the curve and re-enter these names at discounted prices.

Lastly, focus on re-maxing (the opposite of rebalancing) your portfolio. Rebalancing is the process of returning one’s current investment allocations back to the original investment allocations.

The downside with rebalancing is it involves selling your winners to buy back your losers – a losing proposition. Re-maxing is adding onto your winners instead.

Signs of pessimism

In closing, though signs of pessimism remain, I think it is premature to wander into the bear camp.

The current environment is a buying opportunity. Of course, investors have to be urged to be deliberate with their choices. The need to be selective while looking for opportunities cannot be emphasised enough.

Given the existing scenario, and as markets could experience a few weeks’ worth of a pullback, investors ought to consider “stepping out” on a shopping spree.

This may seem counterintuitive but remember when markets get “emotional”, that is always a good sign to pile in — slowly and surely.

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