Why it helps to Understand the Stock Market
When I was younger, I remember reading Robert Kiyosaki’s book Rich Dad Poor Dad and really liking that he took time to explain that the “why” for something is more important than the “how”. His argument is that once we have a compelling “why”, it will be much easier to commit to the “how”, even when the “how” is not as easy or as attractive as we might have thought it is.
I am also a great fan of our local guru, Sunny Bindra. Sunny is ever bashing our obsession with the “secret” of this and the other, hence for example the instant rise to stardom of those who top national exams and their suddenly all-knowing kin and teachers. Media houses are very keen to “dig out” their secret for success and to offer it to us. Every so often, they will feature a millionaire (real or not), sharing his/her secrets to quick millions. We love these stories, but quite often, reading, watching or listening to them does not result in changed habits in us that would guarantee our own success.
In my view, the reason for this is that in most cases, the “how to” is often stupendously simple. It is within easy reach of everyone. Who doesn’t know that more attention to and by teachers, more time with books, greater support from family will increase a student’s chances for attaining a better grade? But why should all the players in this equation take the trouble? That’s what really makes the difference.
Similarly, how to get trading in the stock market is awfully simple. Walk into any stock broker’s office armed with copies of your ID, a utility bill, PIN certificate, 2 passport size pictures, bank statement/ATM card and some Ksh. 1,100 and you will leave having happily opened an account. Shortly thereafter, the broker will be informing you that you are a “proud” shareholder of Mumias Sugar Company Ltd! It is that simple and easy! And many people have done it. Yet the number that persists and remains active enough in the market in order to benefit from its true strength – long-term active participation – is by far smaller.
When the Initial Public Offers (IPOs) hit us in Kenya from early 2000s and everyone associated them with a quick buck, the number of stock trading accounts opened soared to above a million. Most of those accounts fell dormant the moment Safaricom, initially offered at Kes 5 a share fell to below Kes 3 during the 2007/2008 post-election violence meltdown. Never mind the share has since gained more than 860% from the Kes 3 to its current price above Kes 29 in 10 years! It is ironical that most of the accounts had been opened so the “investors” could purchase Safaricom.
So why should you understand and participate in the stock market? You should if you are serious enough with your life to find it necessary to examine your dearly held desires and set some goals for them. It was Socrates the philosopher who said that the unexamined life is not worth living. The moment you examine your life and get setting some goals for it, you will realize that many of those goals will require to be financed. The ones that will matter to you most will require the kind of money that you are not likely to raise from your monthly income. And as if that is not bad enough, you will realize that even your annual income cannot raise the finances required. It will take a strategy of long-term savings and profitable investment in order to attain them.
This realization and your commitment to your goals are what will lead you to investigate how the wealth necessary for a good life –as defined by each individual – is created through investments. You will then gladly discover that there aren’t an awful lot of safe ways of investing your savings available to you. The stock market stoically claims its place in this small number of options. Do your life goals mean the world to you? Are you committed enough to them to tough it out in order to achieve them? Then you need to understand the stock market because it is a necessary tool in the box for your journey.
