Share prices are low, so why are we not buying?

It is likely that many Kenyans — including multi-millionaire athlete Pamela Jelimo — have not heard about Robert Kiyosaki.

He is neither an athletics coach nor an Olympic gold medallist but he knows a thing or two about winning big and making money.

Because Kiyosaki understands that not everybody can make millions of shillings from running like Jelimo did, he wrote a book called Rich Dad, Poor Dad, in which he gives valuable tips on how one can make money through business — including trading at the stock exchange.

He said the stock market operated on a simple principle. When a person buys shares, he expects their value will go up and he can sell them for a profit at a later date. Such a person is called an optimist. Usually, the person selling to him assumes that the shares are unlikely to go up — at least not in the short term.

He sells because he does not expect to make any more profit by holding on to the shares. Kiyosaki calls such a person a pessimist. And that is how he arrived at the conclusion that for the stock market to operate, it needs the pessimist to sell and the optimist to buy.

Closer home, the value of shares has been plummeting at an alarming rate in recent weeks, wiping out millions of shillings of investors’ wealth.

Only a week ago, the value of shares at the Nairobi Stock Exchange was estimated at more than Sh1 trillion. But in less than five days, it lost more than Sh600 million. Except on Thursday and Friday, when some counters rebounded, the entire week recorded a significant drop in share prices.

Many were alarmed by this trend because in the US, a mortgage company called Lehman Brothers had collapsed, putting in peril several top banks and other companies which had secured loans through the company.

This caused panic across the world and share prices in Europe and Asia responded immediately by tumbling. Thankfully, they started to recover soon after the US and Japanese governments injected billions of dollars to stabilise the banking industry which was tottering on the brink of collapse.

Buying cheaply

In Kenya, one would have expected that with the dramatic fall in share prices, investors would be rushing to buy cheaply in the hope of selling again when the shares rebound.

But judging from the queues at stock brokerage firms in Nairobi, there were too few optimists and too many pessimists.

It is likely that most investors and speculators are going through a cash crunch on account of the rising cost of living which has been made worse by high fuel and food prices. But again, those who buy stocks have peculiar habits, just like Safaricom customers.

When the prices fall, they run away from the NSE but sprint back when the prices begin to go up. The result is that many small-scale investors end up buying overpriced stocks and often lose out when the prices decline “to correct themselves” as experts say. Yet they could make more money by buying when the stocks are cheap.

From what I have heard, the people who make money from investing in stocks are those who buy shares and “forget” them for years. What this implies is that unlike in athletics, in the stock market, victory does not always go to the fastest but to the most patient.

However, even patient men and women need to have confidence in the stock exchange for them to agree to hold on to their investments in the face of declining fortunes.

And this is the one ingredient that has been missing from the market ever since the Safaricom shares were first listed in June.

Although the 50 billion shares lifted the value of the stock exchange past the Sh1 trillion mark, they have swamped the market and this has depressed trade in other counters.