Monday, August 11, 2008

NSE bear/ correction: Survival strategies


First of all, a bear is defined as 20% fall in the general stock market over a period of two months. Yani, one it must fall by 20% or more and two, it must to do so over a period of two or more months. A market correction is defined as a decrease of similar magnitude (i.e. 20%) but over a shorter period during a bull season. So do we have a bear or a market correction? Judge for yourself...

Investing strategy will always be about timing. Are you long, short or speculative? Your strategy choice will depend on many factors but will probably boil down to how monetary challenged you are.

A market correction gives long-term investors a chance to look at how resilient their portfolio is. If it’s a resilient portfolio, it may fall but only by half or even less compared to market index. Short-term and speculative investors will probably use the opportunity to book their gains and look for more positions to take ready for the next bull rally.

A bear is a different animal altogether. Long-term investors typically find themselves having to buy and even (God forbid), sell. Typically, a long-term investor will sell to lock-in gains on stocks that were below their desired long-term return. On those already above desired long-term return, a bear market may in certain situations offer an opportunity to buy the same at such a price that the average buying price opf shares held on that stock is lowered. For example, say you are long on KCB having bought at Ksh169 in Dec 2006, subsequently added some at Ksh24 (after last yr's spilt). Right now, you are still very much in profitable territory. If it falls to say Ksh19 (say after the rights), you may want to buy some such that you are able to reduce your average overall buying price to KSh20.
For the short-term investors and speculators, the bear market sees many run-off unless they are keen judges of minute rallies. However, even they can find opportunities for example by anticipating corporate actions say results announcements that may lead to higher than expected PAT or even happily, dividends.

No matter your holding period, investors must use the bear/correction period to streamline their portfolios (code for sell) and of-course to think/look outside the box.


4 comments:

ka-investor said...

very informative piece MainaT. Thanks. What do you think would be the effect of the Coop Bank IPO on this bearish market?

MainaT said...

Kainvestor-the practice the wro over is not to do IPOs if your bourse is bearish in case there is under-subscription. I don't think there will an under-subscription but the liquidity factor will come into play.
If you recall, we had this same issue in Q1 2007 and they postponed AK and KRe as well as KenGen for a spell.

J K said...

@MainaT: By your definition,we neither have a bear nor a correction because from June 20th, 8 weeks ago, when the slide started in earnest the NSE index had dropped from 5271 to 4676 as at close of business last Friday. In the same period the NASI had dropped from 111.202 to 99.508. In both indexes the drop in the last two months has been around 11%.

The begging question is, what is it, if it's neither a Bear or a correction??
On A different note can you please give me links to details, like PE ratios etc of companies listed at the LSE. Thanks

MainaT said...

JK- I used 6/6/8 as my reference point. This is the Friday before Safcom came into the market. Its also the highest level, the NSE reached before the current fall. 2ndly, I also include the trend-line to show things have been going one-way since then.
Unfortunately alot of this data is only available if you are an investor however, the LSE website as well as the FT offer you an opportunity to create a portfolio.