Ten golden rules of investing

I am not a financial expert but having seen many people make grievous mistakes in the financial markets, I am left with one conclusion: people need financial experts who can bluntly give them rules to play by. This is because at most times, people make mistakes which they would have otherwise avoided were they better advised.

In this article, we take you through our 10 rules of investing, which are a set of dos and don’ts just like the Biblical 10 Commandments. But besides the 10, there are two other rules that encompass all the 10.  These are; Thou shalt not panic in a bearish market and secondly, Thou shalt not exit too fast in a bull market.  This, in short, is to say that patience really pays.

1.      Thou shalt conduct adequate research before taking position in any form of investment. Investments can range from shares, offshore, local fund, real estate, venture capital fund, e.t.c. Just imagine what would have happened if you took positions in Uchumi before the collapse, or Housing Finance when it was trading at Kshs65.00 when its EPS was at less than 3?  Think of the investor who rushed into buying the posh maisonettes on Mombasa Road.  It is very important to have all the necessary information about any investment to be sure you have the best value for your money.

2.      Thou shalt buy and hold on to your investment.  Evidence shows that the best investors in the world are more of long- term than speculators.  This is true of Warren Buffet who seeks value in the companies he invests in, true of Peter Lynch, Mark Mobius, John Templeton and all other leading investors.  Speculators who invest short-term typically miss out on the best trading days in a market.  This is because over time and when well chosen, stocks will always gain value from their current trading status.

3.      Always remember to average down on the counters you hold.  Remember that markets will always come down and at times go up.  The gain can be up to as high as 100 percent, while the depreciations can be milder, 2 to 15 percent, under normal market price fluctuations.  The best one can do in a bearish market, where prices are depreciating, is to accumulate the counters one is holding.  In doing so, one averages down the prices, which gives them the opportunity to make shorter term profits in the case of small price gains.

4.      Thou shalt always diversify.  Just imagine that you put all your cash into a huge mansion along the prime Mombasa Road (of course without prior research) then the Housing Minister ordered to have it demolished before you could even recoup any cash from rental payments?  Imagine also if you committed all your funds into the agricultural sector then poor climate drove the industry southwards?  You would be at a loss because this would translate to a loss in your investment.

5.      Thou shalt always buy a good stock and put it away.  Just imagine that you bought very stable counters and just when the market was on a correction mode, you sold off everything and took your losses, swearing never to invest in the equity market again.  This rule applies to the speculators.  Unfortunately, this is not the way an ideal investor would go about his/her daily work.  You must have the patience to hold if you want to reap great returns.

6.      Remember that you cannot afford to be out of the market.  This happens most of the time and renders many investors minimal investors because they lose out on the opportunity to maximise gains.  Here is a case in history; Majority of the investors in the local market bought Pan Africa Insurance in anticipation for an excellent dividend payout.  Immediately after the dividend was paid out, majority sold their stake at highs of KShs86.00 thinking that the stock would not go further.  After the books closed, the stock jumped from the KShs86 to trade at over KShs96, sparked by keen interest generated by the fund managers.

7.      Thou shalt never try to time the market.  Most people say that they have been able to beat the NSE 20 Share Index, meaning that an investor who puts in his cash at the 20 composites is able to get a 70 percent return even when the index yields only 35 percent on average.  This is next to impossible and you should never try it.  The best one can do is to seek value and the rest shall take care of itself.

8.      Always rearrange your portfolio by age.  To ensure that you maximise the best trading days in the market, it is always very important to rearrange your portfolio by the date in which you bought them so that you don’t lose out on returns pegged to longer-term holding.

9.      You should never assume that your broker will watch your account.  At most times, investors assume that brokers will perform some magic on their accounts.  This is usually the case where people believe that they cannot make any wise investment decision until the broker does it for them.  You should only seek for broker opinion but never let him manage the account for you.  At most times, he will only do it in the first few days then leave it up to you.

10.  You must trust me on this one; the market will always come back.  You may have missed out on, or totally lost out on your investment, but a drop in a market should not be a signal for you to sell off.