Dear Dr Pesa,
Is this a good time to invest in stock markets? I mean we are living in tough times with the coronavirus pandemic, many businesses may not be doing very well especially with the lockdowns and quarantine stipulations. But I am still looking to make an investment and I have my eye on the stocks, hoping the prices will go down and rise again after the hurdle. Is this a reasonable plan? Please advice.
Indeed, with the Coronavirus pandemic, businesses may not be doing well especially with the lockdowns and interruption of supply chains. As you may be aware, stocks represent ownership interest in a company, which provides investors with the opportunity to make profits either through dividends or capital appreciation. Investing in the stock markets is risky since the performance of the stock affects the investment of the shareholder. In other words, when the stock’s value decreases, the investment also loses its value.
Kenya’s equities market has been on a downward trend ever since the country confirmed its first case of Coronavirus on March 13, 2020, causing most stock prices to decline. The question on investors’ minds is, is it a good idea to invest in the equities market with the continued price decline? Will they recover after the crisis is over?
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The continuous price decline has presented investors buying opportunities, since they can acquire the stocks more cheaply. However, the stocks might take a longer time to recover. Therefore, if you are buying into the stocks, do it for the long term. You have indicated that there are stocks you are looking to invest in. This means that you have a watch list. Watch lists help investors monitor and spot investing opportunities in the stock market.
Before buying a stock, look at its historic price performance. Ask yourself, “Is the price of the stock I am considering buying stable, or has it been declining over time?” It is normal for stock prices to decline; it does not necessarily mean that the company is performing badly. The price decline might be attributable to price corrections like the one we saw for banking stocks earlier in the year, after they rallied following the repeal of interest rate caps, which in turn boosted investor sentiments.
On the other hand, stocks whose prices have continuously been declining while its peers are stable or appreciating are a red flag. If you are interested in the stock, understand why the price has been declining and ask yourself what other investors are seeing that you’re not. Buy a stock whose price you think will improve after the crisis. A common mantra among investors is “buy low, sell high”. You should also look at the returns you stand to gain with the stock once the situation improves.
Although investing in the stock market is risky, it is a good move. Even so, you should not invest your money all at once. It may be more prudent to buy the stock at every price dip because it is difficult to accurately anticipate price declines in the market. Do not try to estimate that in the coming days the prices of the stock will continue to decline. For example, if the price for stock A is trading today at Kshs 33.0 shillings, down from Kshs 36.0 recorded yesterday, buy the stock today with a portion of the money you intend to invest. If prices take a dip again tomorrow or in a few hours, buy more shares. However, only buy shares you have done your due diligence in and whose performance you have confidence in.
In case you wish to make gains through dividends, look at the performance of the company whose stock you are buying as well as the dividend they pay out. Dividends provide investors a stable stream of income as well as capital appreciation. Look for a company with high payout ratio and understand the price to earnings ratio of the stock before the prices started declining. Price to earnings ratios help investors know how much they stand to gain per every share they purchase. Bailing out of a market when the prices take a hit is not sustainable as you will never reach your long term or short term financial goals.
If you are an investor in the stock market, with the prices continuing to decline, you may be tempted to bail on the equities market and sell your shares. Research has shown that during the 2008–2009 financial crisis, those who held onto their shares doubled their investments after the crisis was over. Warren Buffett, one of the most successful investors in the world is known to have profited when stock prices were down.
In conclusion, this is the best time to invest in the stock market, if you are looking to buy for the long term and after considering all the above factors. Understanding the stock you want to buy is the first step into making a good investment decision and having a stock watch list, which will help you track the performance of a stock over time.
Dr Pesa is Ann Wacera, who is part of the investments team at Cytonn Investments.