The difference between a face value investor (TV business news watcher) and a knowledgeable stock market investor

In school we were told not to judge a book by its cover, and for those who did chemistry that taste was not a type of test for a substance however sweet its aroma. Even with the inculcated principles, we still take issues at face value and make critical decisions based on limited information. You will experience it every day especially in the so called high end buildings, where the askari (guard) will stop anyone who seems underdressed, and salutes the fellow in what he perceives as an expensive outfit.

It is interesting how deep this goes. On Friday evening I got a lift from Edede, a friend of mine, who happens to own a Mercedes Benz. I was seated at the back left with the reading light on, going through the paper. As there was a lot of traffic Edede decided to “overlap”, and at the next junction there was a police officer who was actually dealing with another driver who had done the same.  He was about to stop us but when he noticed “I” seated in the back left with the reading light on, he actually stopped the oncoming vehicles to allow us through.  He made a decision based on what he saw, and based on his prior experiences assumed that I must be a dignitary.

The issue of taking action based on face value affects not only the askari who believes that a tie denotes respect and authority, nor the police officer who believes that someone sitting in the back left of a Mercedes must be a very important person, but also to us who claim to be highly educated and informed.

Following wrong advice

Many of us put money (a.k.a. invest) in the equities market, then like a male peacock with its beautiful plumage, strut around as expert investors. We select counters based on half-baked information offered by very questionable characters. You can be consoled that this is a worldwide phenomenon as we saw with Desi in Kenya, public riot causing Pornzi schemes in Darfur and Madoff in the US, but this should not be justification for the educated elite to sit pretty.

Every evening you sit in front of the television set watching business news as the presenter gives a rundown (note the choice of words) of the market performance. “Kenya airways went down by 8.5 percent to KShs57”, you get all sweaty because you bought the share at KShs61. All this perspiration would have been avoided if only you watched the stock market, its activities and your activities beyond face value.  You have a strategy of buying shares worth KShs11,000 every month and below is your summary of Kenya Airways purchases for the past 6 months.

Unfortunately all you remember is the last transaction of KShs61 yet if you maintained your portfolio electronically and referred to it regularly, unlike your defined pension contributions, you would have been aware that your average price for Kenya Airways shares was actually KShs38.86.  Meaning therefore that the current price of KShs57 indicates your holdings are still 32 percent positive.

Go for complete information

When you listen to part of a story without the benefit of the entire, any decision based on that snippet will most likely be wrong. This was seen with the reaction to the drop in price of Safaricom soon after its listing as people (it’s an insult to refer to them as investors) dumped the share at below the listing price.  Many bought the share because they heard that the price would go to KShs17 but we were so busy rushing to buy that we never got to hear the rest of the story “. . . over the next few years”. For a long time I was like all of you, looking at the stock market in the same way that I looked at the vegetable market, but I saw the bright light which fortunately was not an oncoming train and now I’ve a better understanding of the equities market.

The revelation was as a result of two issues: I love spreadsheets, and I am a bully. So when I got tired of downloading the NSE pricelists I bullied a “system developer” (not programmer) friend of mine to get me a better way for me to manage my portfolio. Being one of those fellows who never take a challenge sitting nor lying down he went off and developed a comprehensive stock market watcher and portfolio manager. You might also have come across it, www.mystocks.co.ke and either found it too complex or intimidating, fortunately I do not and have had my portfolio on it ever since.  The site would download the NSE data, parse it and produce trend graphs all without me having to do anything. This information would then automatically update my portfolio valuation, giving me a snapshot of my “investment”.

When the NSE introduced the data vending service the site developers registered as data vendors which meant that apart from getting an end of day status including highs, lows and volumes, I could watch the market from my desk or smart-phone throughout the trading day. The site provided me with relevant information (36 28 36) not data (362836) which has enabled me to become an effective technical trader not a speculator.  You carry around expensive smart-phones yet are unable to take advantage of the facilities they provide to become better investors; instead we prefer to make face (book) value knee jerk decisions.

As the website developers are also active players in the stock market, they have been able to continuously develop the features on the website. More recently they released a totally new site live.mystocks.co.ke which makes decision making a synch.  Comparing different counters is now a click away, but unfortunately the portfolio manager has not been migrated to the new site. With the new site those hardcore technical analysts have more tools and additional graph types such as candlesticks. The fundamental trader also has access to some of the listed company’s financials.  Today my trading is more informed than ever before and my trading profits are growing exponentially all because I have information at my fingertips.

The choice is yours; do you want to remain as a face-value investor, come daily TV facing armchair perspirer, or a knowledgeable stock market investor?