You are at the bus stop. It is 6pm. It is cold and dark clouds begin to form in the sky. You have no sweater or jacket or umbrella. The wind is blowing and the smell of rain is in the air. You live in the suburbs, say Kiambu, Kitengela or Ongata Rongai. There aren’t too many matatus coming into town because the traffic on the highways is something from a horror movie. The last time it rained, you were charged KES 500 for a trip that normally costs you KES 80. Today you have KES 250…and some spare change from lunch.
“Matatu selection expert”
If someone came up to you and promised to get you into the next matatu, to even let you choose your seat and guarantee that you would not have to pay more than KES 100 for the trip (but you would have to give them KES 50 as a fee for their services) would you believe and give in to them? If they said they were a “matatu selection expert,” would you believe them then? If they said they could verify their claims with graphs and charts, would you believe them? Probably not.
So why would you believe someone or some big, seemingly respectable firm who suggest that they can tell you which shares to buy to guarantee you good returns? The same way you would be crazy to believe our “matatu selection expert” is the way you should treat that cheat. Because, save for one with insider information, which is illegal anyway, no one can guarantee you returns from any stock. The best that can be done is to be given investor advice from a financial expert who has carried out in-depth research on the stocks, the industries the stocks are in and the economy as a whole.
The most reliable mechanism of predicting movements on the stock exchange is comparing the share price and the net book value to determine if it is overvalued or undervalued. If a share is overvalued, the share price should drop in value while if the share is undervalued, the share price should rise over time. To add to this, when a company makes a positive announcement, say announces a dividend or acquisition or other positive news, the share price should rise while negative news such as a loss announcement should drive the share price down. I say “should” because the stock market is not efficient and not every piece of information that is out there affects share prices though they ideally should.
This conversation can go on and on so let me leave you with this: the same way you would not entrust your carriage home on a rainy day (literally speaking) to a “matatu selection expert,” do not believe in anyone prophesying share movements to you. There is no magic crystal ball. Do not be fooled.