Consistency helps investors in shares create real wealth

Opinion and Analysis

 

Nairobi Securities Exchange staff Winny Jones attends to an investor. PHOTO | SALATON NJAU |  NATION MEDIA GROUP

 

By RUFUS MWANYASI

Looking at the market in the past 12 months, one may be tempted to conclude that the market has not realised any value in relation to price.

However, if one goes a little further behind say six years ago, then you realise the market has risen actually done better, rising more than 120 per cent despite experiencing two bear markets and one “sideways” market during the period.

In other words, if one just bought the “index” beginning of 2009, the portfolio should have more than doubled by the close of last year which translates to an annual rate of return of 14 per cent.

This is not bad for a six-year wait. I am sure some “best-of-the-breed” investment managers would lose sleep to get this kind of return.

I say all this to show why a clear selection process applied consistently is important in meeting one’s objectives.

Here is a good example. A strategy yielding 10 per cent per year, which may seem small in the eyes of many, but which in a period of 60 years (a little longer than most of us will be or want to be investing, but it proves the point) turns a Sh10,000 investment into a staggering Sh34 million goes to show the power of consistency.

Notice, in spite of the not-so-spectacular rate of return, the consistency of the approach followed on a long-term basis and boosted, thanks to the compounding effect, played a big role in determining results as opposed to merely the annual rate of return.

Sadly, most investors do not need to see the need or value of having a consistent strategy. In their search for investment profits, most investors focus on the spectacular.

Most think investing is about finding one or two hot stocks, buying them, then cashing out for a huge gain.

I know there will always be hot stocks. That’s just the way it is. But usually this group of stocks will run very hot and then very cold. That’s not how money is really made in the world of investments. Far from it, investing is the business of getting a return on your money.

If your purpose of investing is to get rich quickly, then a different strategy is needed and not that of a person who wants to accumulate wealth over a time period.

I would suggest to you that getting rich quickly, which can happen in the stock market, is not as likely and carries with it a much higher degree of risk.

Lastly, a clear investment strategy will include an exit plan. This can be seen in two ways; an exit triggered when a predetermined goal is reached or when an investment turns south and starts to show losses.

The latter is critical since most investors generally do not have a problem exiting when a position shows some profits. Cutting losses has always been a great challenge but it is necessary if one is to survive in the long run.

The infamous speculator Jesse Livermore summed it up best when he wrote, “I believe it is a safe bet that the money lost by short-term speculation is small when compared with the gigantic sums lost by so-called investors who have let their investments ride. The intelligent investor will act promptly, thus holding his losses to a minimum”. I couldn’t agree more.