Five mistakes to avoid when investing in the stock market

A few moons ago, I wrote about how my chama, nay investment group, made a decision to invest – and pull out – of the stock market.

I shared with you what we made in shares dividends and our shortsighted decision to liquidate the portfolio.

About how we collectively forgot that wine is made not only of grapes and yeast, but of skill and patience.

A handful of you emailed me after that story.

We had healthy smart conversations about how to invest smartly in the stock market, and grow a healthy portfolio.

I realised from these conversations that my chama had made crucial (and naive) mistakes in how we invested.

I share with you these mistakes with a hope that you’ll take the lessons and keep them under your belt, for when you’re ready to take the plunge to invest in the stock market:

1. We didn’t invest big money

Our total investment was Sh600,000. Part of our portfolio was Sh100,000 for 6,200 shares in Safaricom and another Sh100,000 for 4,600 shares in Umeme Uganda.

I’ll be blunt about this: investing Sh100,000 will not get you mileage in the stock market. It’ll get your foot into the door but it won’t get you the mileage to earn place on the table and dine with the big boys.

Looking at our portfolio, we should have been bold enough to go in with more money but invested in fewer company. Not piecemeal splits as we did here.

Say, Sh300,00 going to Safaricom and another Sh300,000 going to KPLC.

One reader who wrote in said she invested Sh50,000 every month for 10 months in 2008. That’s Sh500,000. Lillian said, “I bought a lot of Safaricom shares, which have since gone up in value. Today, my portfolio is worth Sh2.6 million. I would realise all this in cash if I sold the entire portfolio today.”

2. We didn’t give the shares the time and patience they required to realise their value

I imagine the stock market to be a slow boil over a jiko you must keep feeding charcoal, while other investments are like a pressure cooker.

The smoke of the jiko might put you off, the charcoal might be unsightly and unforgiving to your palms and finger snails, the stockiness of the jiko itself might make good material for bad jokes, but give it time and you’ll undoubtedly enjoy the intense flavours of the dish you’re cooking over the jiko.

My chama hastily liquidated its portfolio in under two years of its purchase. There’s nothing you can get in two years from the stock market but ridiculous miserly dividend cheques.

Two years is not enough for the share value to appreciate.

Andrew said, “Warren Buffet invested in his first shares when he was 11. He kept putting in more and more money into the stock market. He became rich in his 50s. At 52, to be exact. He’s 84 now and always makes the Forbes list of millionaires. And he’s still investing. That’s 73 years investing in the stock market!

“Your chama should think like Warren Buffet and go the long yard.”

A local equivalent to Warren Buffet is Chris Kirubi. He began investing in the stock market in the early 80s and to date, his investments include shares in Centum Investments, Haco Industries, Capital FM, KCB and Nation Media Group.

3. We focused on the short-term dividend income instead of the long-term capital gains

The mistake we made is that we didn’t master the golden rule of investing in the stock market: that it’s for the capital gains and dividend growth (key word: growth).

Safaricom’s share value in 2008, at it’s IPO (initial public offering), was Sh3.50. On the day of writing this – March 15, 2019 – the value of a share is Sh27.75.

In 2009, Safaricom paid a dividend of 10 cents. In 2018, Sh1.10.

One reader also shared the capital gains for a list of other shares trading locally. Mukibi said, “Have a look at this analysis from last year.

“You will see that in the last 10 years, those 20-odd stocks have enjoyed capital gains (adjusted for share splits, bonuses) averaging 18 per cent per year.

That means, over the long term, a stock with a modest dividend payout (5 per cent) plus a 5 per cent capital gain would beat saving/investing in a Sacco at 7.5 per cent.”

4. We didn’t diversify our portfolio smartly

My chama invested in the stock market of three different countries – good enough – but another way to diversify would have been to invest in different industries.

Mukibi was yet again gracious in telling me how. He made reference to the share indexes.

Indexes is what investors use to track the performance of the stock market.

Mukibi said, “A very straightforward way of diversifying is to invest in an index.

On the NSE, we have the all-share index, the 20-share index, the 25-share index, the 15-Share Index... Here, you simply buy all the stocks in the selected index in the proportion of their market capitalisation [caps].

“An alternative strategy would have been to buy stocks in all sectors. Say, bank stocks, energy stocks, agricultural stocks and so on. There are still more ways of diversifying. Invest in large-caps (Safaricom, KCB) plus small-caps (Carbacid, Kapchorua).

"Growth and high price-per-earnings (EABL, BAT) plus value stocks with low price-per-earnings (Kengen, Kenya Re). High dividend payers (KPLC) plus low-dividend payers (Diamond Trust Bank).”

5. We didn’t entirely understand what being shareholders translated to

When you invest in the shares of a company, you’re buying a piece of that company and are entitled to the earnings the company makes.

If the company makes the right business decisions through the year and makes a profit, management could decide to give shareholders a share of these profits through dividends.

They could give more dividends than they did last year; the rates are never fixed.

The point is, the shareholders benefit directly when a company is performing well.

Lillian said, “Companies have to give the shareholder a reason to buy more or keep their shares. This why they launch new products (think Safaricom and Fuliza and M-Pesa), or how they enter new markets (notice how BAT and Coca Cola are foreign companies but have had to seek new markets to increase their share price.)

“Even KenolKobil which is being bought by Rubis Energie has expanded into other markets. Britam and its vast real estate holding building malls such as Junction and many apartment blocks in Kilimani.

“Stocks always outperform the other investments for this reason.”

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