5 Simple Truths Smart Investors Forget

Some of the smartest investors I know continuously struggle to get ahead because they forget to address a few simple truths that collectively govern our potential to make progress. So here is a quick reminder:

No 1 – Education and intelligence accomplish nothing without action.
It does not matter if you have a genius IQ and a PhD in Business Administration; you cannot change anything or make any sort of real-world progress without taking action. There’s a huge difference between knowing how to do something and actually doing it.
Knowledge and intelligence are both useless without action. It is as simple as that. For some practical guidance on taking action, I highly recommend The Now Habit. Your number one enemy as an investor is Procrastination.

No 2 – Happiness and success are two different things.
I know an extremely savvy businesswoman who made almost a million Naira online last year. Every entrepreneur I know considers her to be wildly successful. But guess what? A few days ago, out of the blue, she told me that she’s depressed. Why? “I am burnt out and lonely. I just have not taken enough time for myself lately,” she said. “Wow!” I thought. “One of the most successful people I know is not happy.”
“What will make me happy?” and “What will make me successful?” are two of the most important questions you can ask yourself. But they are two different questions.

No 3 – Everyone runs their own business.
No matter how you make a living or who you think you work for, you only work for one person, yourself. The big question is: What are you selling, and to whom? Even when you have a full-time, salaried, ‘Corporate Nigeria’ position, you are still running your own business.
You are selling one unit of your existence (an hour of your life) at a set price (the associated fraction of your salary) to a customer (your employer).
So how can you simultaneously save your time and increase your profit? The answer is slightly different for everyone. But it is an answer you should be seeking.

No 4 – Having too many choices interferes with decision making.
Here in the 21st century where information moves at the speed of light and opportunities for innovation seem endless, we have an abundant array of choices when it comes to designing our lives and careers. But sadly, an abundance of choice often leads to indecision, confusion and inaction.
Several business and marketing studies have shown that the more product choices a consumer is faced with, the fewer products they typically buy.
After all, narrowing down the best product from a pool of three choices is certainly a lot easier than narrowing down the best product from a pool of three hundred choices. If the purchasing decision is tough to make, most people will just give up.

So if you are selling a product line, keep it simple. And if you are trying to make a decision about something in your life, do not waste all your time evaluating every last detail of every possible option. Choose something that you think will work and give it a shot. If it does not work out, choose something else and keep pressing forward.

No 5 – All people possess dimensions of success and dimensions of failure.
This point is somewhat related to point No 2 on happiness and success, but it stands strong on its own as well…
Trying to be perfect is a waste of time and energy. Perfection is an illusion.
All people, even our idols, are multidimensional. Powerful business men, polished musicians, bestselling authors, and even our own parents all have dimensions of success and dimensions of failure present in their lives
Our successful dimensions usually encompass the things we spend the most time doing. We are successful in these dimensions because of our prolonged commitment to them.
This is the part of our lives we want others to see – the successful part that holds our life’s work. It is the notion of putting our best foot forward. It is the public persona we envisage as our personal legacy: “The Successful ABC” or “The Award Winning XYZ.”

But behind whichever polished storyline we publicly promote, there lies a multi-dimensional human being with a long list of unprofessed failures. Sometimes this person is a bad husband or wife. Sometimes this person laughs at the expense of others. And sometimes this person merely takes their eyes off the road and rear-ends the car in front of them.

Daily Value at Risk

Daily value at risk is an estimate of the potential loss that might arise from unfavourable market movements if current positions were to be held unchanged for one business day, measured to a confidence level of 99%. This is to guard against incidence of significant market movement, consequently improving management transparency and control of the market risk profile. Daily losses exceeding the daily value at risk figure are likely to occur, on average, five times in every 100 business days.

 Most financial institution uses an internal daily value at risk model based on the historical simulation method. This internal model is also used for measuring value at risk over both a one-day and 10-day holding period at a 99% confidence level for regulatory back testing and regulatory capital calculation purposes respectively. This model covers general market position risk across all approved interest rate, foreign exchange, commodity, equity and traded credit products

There are a number of considerations that should be taken into account when reviewing daily value at risk numbers. Namely:

Historical simulation assumes that the past is a good representation of the future. This may not always be the case.

The assumed time horizon will not fully capture the market risk of positions that cannot be close out or hedge within this time horizon.

Daily value at risk does not indicate the potential loss beyond the selected percentile.

Intra-day risk is not capture.

Credit Process

Bank’s credit starts with portfolio planning and target market identification. Within identified target markets, credits are initiated by relationship managers. The proposed credits are subjected to review an approval by applicable credit approval authorities. Further to appropriate approval, loans are disbursed to beneficiaries. Management of loans is undertaken by both relationship management teams and credit risk management group.

   If a preliminary analysis of a loan request by the account manager indicates that it merit further scrutiny, it is then analyze in greater detail by the account manager, with further detailed review by credit risk management. The concurrence of credit risk management must be obtained for any credit extension. If the loan application passes the detailed analysis it is then submitted to the appropriate approval authority for the size of facilities.

The standard credit evaluation process is based both on quantitative figures from the financial statements and on an array of qualitative factors. Factual information on the borrower is collected as well as pertinent macroeconomic data, such as an outlook for relevant sector, etc. These subjective factors are assessed by the analyst and all individuals involved in the credit approval process, relying not only on quantitative factors but also on extension knowledge of the company in question and its management.

Control Issues

A control issues is define as any aspect of the design, implementation or operation of a control that could result in the control objective not being achieved. A control objective is a statement that clearly describes what the control has been designed to achieve and refer to a control that require strengthening or one that requires implementation due to a change in business risk appetite. Failure of a control can cause an event that leads to a financial loss or non-financial impact for the business. CIs identified are managed and reported via a robust governance process.

Credit Risk Management.

Credit risk arises from the failure of an obligor of a bank to repay principal or interest at the stipulated time or failure otherwise to perform as agreed. The risk is compounded if the collateral only partly covers the claims made to the borrower, or if its valuation is exposed to frequent changes due to changing market conditions (i.e market risk).

The goal of a bank is to apply sophisticated but realistic credit models and systems to monitor and manage credit risk. Ultimately these credit models and systems are the foundation for the application of internal rating based approach to calculation of capital requirements. The development, implementation and application these models are guided by a bank base strategy.

A bank may, implements a consistent pricing model for loans to its different target markets. Also a client interest is guarded at all times, and collateral quality is never the sole reason for a positive credit decision.

Risk Appetite

Risk appetite is an articulation and allocation of the risk capacity or quantum of risk firm is willing to accept in pursuit of its strategy, duly set and monitored by groups of bodies. Risk appetite reflects a company’s capacity to sustain potential losses arising from a range of potential outcomes under different stress scenarios.

A firm defines its risk appetite in terms of both volatility of earnings and the maintenance of minimum regulatory capital requirements under stress scenarios. Risk appetite can be express in terms of how much variability of return a bank is, prepared to accept in order to achieve a desired level of result. It is determined by considering the relationship between risk and return.

We measure and express risk appetite qualitatively and in terms of quantitative risk metrics. The quantitative metrics include earnings at risk (or earnings volatility) and , related to this, the chance of regulatory insolvency, chance of experiencing a loss and economic capital adequacy.

Strategy and Business Planning.

Risk management is embedded in a business strategy and planning cycle. By setting the business and risk strategy, a company is able to determine appropriate capital allocation and target setting for such companies. All business units are required to consider the risk implications of their annual plans.

These plans include analysis of impact of objectives on risk exposure. A group of experts monitored a business performance regularly focusing both on financial performance and risk exposure. The aim is to continue the process of integrating risk management  into the planning and management process and to facilitate informed decisions.

Through ongoing review, the links between risk appetite, risk management and strategic planning are embedded in the business so that key decisions are made in the context of the risk appetite for each business unit