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.
5 Simple Truths Smart Investors Forget
Daily Value at Risk
Credit Process
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.
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.
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.
Rise in shares investment
Investment in shares in the Nigerian stock market has continued to get better after the general elections in the country which returned President Goodluck Jonathan to the seat of power.
The attitude of both local and foreign investors to the equities market after the elections can be described as positive following the increase in turnover and capital appreciation that has become the order of the day in the stock market.
The stock market, prior to the April general elections, especially after the global financial contraption, was variously described as an anathema with which majority of investors did not want to have anything to do, let alone investing in the stocks.
But with the successful completion of the elections, despite pockets of violence in some regions of the country that led to the destruction of lives and property, investors have begun, once again, to embrace investment in shares.
Shares investment, it would be recalled, is a window of investment that is open to both the high and the low in the society, and it has served as a veritable exit route for most people who either want to have another source of income and/or save for retirement purposes.
An x-ray of the transaction in the equities market last week showed that investors’ confidence has greatly risen as against the palpable fear and patent uncertainty shown by the investors when the elections were at hand. Most capitalised stocks and the penny stocks are beginning to enjoy much attention as investors have continued to inject fund in the area.
Stockbrokers, who were technically out of job in the market owing to investors’ apathy to investment in the stock market, are now busy with investors mandate either to sell or buy as the case may be.
Most dealing houses that laid off their staff in the wake of the financial crises that hit the emerging market, and by extension, the stock market, have started to recall them, as there are now more transactions to do, unlike that bleak period when brokerage firms could not afford to pay their staff let alone paying their rents as and when due.
A cross section of investors who spoke to the Nigerian Tribune Investors Guide, said that another good time to inject money into stocks was now, when especially all the permutations on the likelihood that the elections would turn violent did not come to past.
They were of the belief that, considering the reform drive of the regulators which has, in no small measure, helped to stabilise the stock market and which, in any way, would not be truncated, there is high probability that the market will begin to return to its old glories of being the greatest market in terms of ratio on investment return.
Investors’ earlier apathy to stocks investment
As a market computed by value of a unit of share either on the selling or buying side and the cumulative turnover on a daily basis, investors’ equities market, due to apathy prior to the election, went through great ordeal which, it was believed in several quarters, would have swallowed the securities market if the general elections had failed.
The trend in the market then, saw the foreign portfolio managers offloading their shares and exiting the economy for fear of the outcome of the election while the local investors exercised cautions when investing in the stock market.
The fear by the local investors stood on a tripod of violence that was likely to engulf the country due to the violent tendencies of the contestants for the elections, the possible reversal of reforms already embarked on by the securities and Exchange Commission and the legal issues still hanging on the position of the Director General and the President of the Council.
It was also a period during which the banks which largely are the major financiers of share purchase by majority of huge portfolio owners in the market were sceptical about further lending for investments in shares.
The banks, it will be recalled, at the close of 2009 financial year, have over N2.1 trillion toxic debt hanging on their necks as result of investments in shares to which they traced 80 per cent of the money.
SEC’s reforms aiding confidence The Central Bank of Nigeria (CBN) recently assured investors in the capital market that the reform policies being put in place by the Securities and Exchange Commission (SEC) was the needed tonic that would help revamp the equities market.
Rise in share supply
Investor's interest in investing in the Nigerian equities market is expected to rise again as transaction in stocks on the floor of the Exchange last week witnessed an interchange of appreciation and depreciation in share value. The move by both local and international investors to reduce their portfolio holding in the market, however, does not call for alarm, as they are only responding to recent gains recorded in the stock market, arising from return of liquidity which was reduced to its barest minimum during the election period.
Experts in securities had at the beginning of the year said that the second quarter of 2011, in the life of the market, would experience some appreciation especially given the derivative from the buy back of some toxic asset of banks by Asset Management Company of Nigeria (AMCON). The buy back of about N2 trillion non-performing loan from the banks by AMCON provided the necessary leverage other stocks were expecting to thrive on, even as most of the banks have returned to their old businesses of lending, which usually drive economic activity in the country and by extension, the capital market.
As expected, the rush to have shares disposed off will continue to take its negative tolls on transaction value at the NSE.The pressure to place shares on the sale mandate of most brokerage firms will definitely reverse the gains which the market capitalisation and All-Share Index of listed companies had chalked at the close of previous week's transaction.
The rise in the sell turnover mandate in the equities market will further result in majority of the blue chip companies stocks depreciating in value, thus forcing the twin market indicators to wear a new status which, in no distant time, will begin to cause anxiety among investors.
Share glut may even become the order of the day in the market as it is always the case when the pressure for sales of shares is high in the market, a situation that usually see supply weighing demand for them. This will also affect prices of virtually all the listed stocks in the market. The insurance sector will no doubt become the worst hit.
The present state of health of the market has further resulted in most brokerage firms becoming busy on the floor of the Exchange, and whether on the sale or buyer side, their commission on every transaction is always guaranteed.
A further x-ray of the market last week showed that some investors in dire need of fund sold their holdings far bellow the quoted price on the exchange, believing it was the only way they could have their holding exchange for money.
Other investors who could not wait until their shares were disposed off and wanted to get their cheques were immediately charged one per cent on any amount of money paid out to them.
The decision of the ordinary and institutional investors who last week chose to invest in the market not based on personal conviction but on pedestrian information may continue to haunt the growth of the market in terms of value appreciation. But as it is now, genuine investors, except for a handful, are the ones approaching the stock market for investment and the performance indicators will soon begin to experience a positive value rise.
Banks' results drive equities market to recovery
It is indeed a time for investors on the Nigerian Stock Exchange (NSE) to heave a sigh of relief with the northward movement in the prices of equities in the last couple of weeks, even as transaction in the second quarter of the year is expected to close in the positive territory.
Although equities value has witnessed a decline for a day or two, the cumulative figures of trading activities in the stock market since the release of some banks financial at the close of the first quarter may have led credence to the permutation by market watchers that the equities market is on its way to recovery.
It will be recalled that trading in the shares of banks before and after consolidation has always contributed to about 50 to55 per cent of transaction volume in the market just as this has continued to dictate the direction of the market in value terms.
The positive financial base being declared by banks in their 31st December 2010 result is no doubt beginning to rub on the blue chip companies and stocks considered in investment parlance as one investors need to take a second look at, as there is a daily recording of price appreciation which continues to beat imagination on what is exactly the driving force behind them.
The removal of obstacles to the progress in the movement of share prices in the market can easily be traced to the commencement in operation of the Asset Management Company of Nigeria (AMCON) whose operations have ensured banks have a negative non performing loan over hang.
The Scheme seems to have brought succour to the market through its buying of the over N2 trillion toxic assets of banks listed in the market and this is taking tolls on other stocks who, in no way, are related to the financial institutions.
The lifting of the burden of debts on the banks whose capitalisation currently accounts for almost 34.2 per cent or N2.9 trillion as at December last year coupled with the negative debt balance sheet all of them are expected to reel out in the year, is making investors to swoop on the shares of banks.
A peep into the review of the market last year showed that 14 banks along side other eight companies made the 20 most traded stock list in the market and this accounted for 62 per cent of total trade in volume terms in the market for 2010.
Information in the market has it that why it is good to invest in companies whose stocks has intrinsic value, it is also germane to note that all over the world where investment in stocks existed, it is wise to understand when to enter the market and when best to exit.
Except for those who are investing for the long time period, other investors, both short and mid-term, must know when exactly to take their leave if the income they so desire from the stock market will end up as mere wishful thinking.
Other Investment Strategies
Constant Ratio System: Unlike the constant naira system, the same percentage of funds is divided between different assets. When the balance is upset, is periodically restored by moving money from over-performing assets to under-performing ones. This system prevents one assets class from dominating portfolio. This is one way to maintain a desirable asset allocation. Variable Ratio System: This is a variation on constant ration system that relies on market timing to shift the proportions of the various asset classes contained in the portfolio. Buying low and selling high is built into this strategy, but, like the constant naira system, prolonged movement in a given direction will harm returns. Bottom-up Analysis: This is a name for investing strategy that focuses on the fundamental of individual stocks as opposed to the state overall economy.
Investing Based on Insider Activity
Another strategy for investing involves looking out for what insiders at a company are doing with their stock. Keeping an eye on insider trades can be useful because it allows you to see what the people who have a large sake in a company are doing with their stock. These insiders are often the ones who know what is going on at the top levels of their company, and so they may have the best information about whether a company’s stock is actually worth more or less than the current price. Insiders can be either individuals or corporations. They are required to report both direct holdings (which are held in the name of the insider) and indirect holdings (which are controlled by the insider but held by a family member, trust, company, plan, or corporation with which the insider is affiliated). Note that we are talking specifically about illegal insider trading (that is insider who are trading based on privilege information), but instead about all types of insider trades, including when know such privilege information exist, but the insider are just generally confident about the company’s outlook.
Contrary Investing
Contrarian investing is a strategy that relies on behaving in opposition to the prevailing wisdom, for example buying when other are pessimistic and selling when they are optimistic, or buying out-of – favor stocks and selling them when they are popular again. In an extended bull market, the term contrarian can begin to mean someone who is bearish or prefers value stocks to growth stocks, although this is really just a subset of contrarian investing.
Naira Cost Averaging
Naira cost averaging is a good strategy for beginners. It involves regular contributions of a fixed naira amount to a portfolio or specific investment. At each interval, the chosen amount is invested, removing any emotional motivation to react to short-term changes in the value of the investment. Of course naira cost averaging does not guarantee a profit, it does encourage consistent investing and prevents short-term movement from leading investors to make emotion-base decisions that could harm their long-term strategy. Because the investment is purchased at a range of prices over time, fluctuations in price are evened and the initial price has a far smaller impact on the returns at the time the investment is sold. The average price paid trends toward the current price at each interval. As a result, the gap between the value of the money paid in and the current value of the investment decreases. However, the average price does not move fast enough to completely eliminate the possibility of profit of loss. Although negative gap from growing between the price paid and the current price, it limits the potential for a positive gap in the same way.
Essentially, naira cost averaging is ideal for investors who wish to eliminate the risk associated with timing the price of an investment and reaction to short – term results at the expense of limiting themselves to a decidedly conservative strategy. Some investors believe naira – cost averaging is most effective when a stock is under-performed because more shares can be acquired for the same regular investments amount. However, better performance is not guaranteed and that aspect should not be the primary motivation for adopting this strategy.
Income Investing
Income investors practice a very straight-forward strategy. They buy stocks with the highest dividends and dividend yields. Income investors focus primarily on securing a steady income stream, instead of worrying about capital gains (although they obviously hope that the shares will increase in value). The stocks of large, well-established companies usually quality as income stocks. Income investing is one of the more conservative stock strategies, yet there are still the usual risks involved in investing in equities. In some respects, this strategy is closer to bond investing than stock investing, even when stocks are used. This strategy in Nigeria is usually practiced by the order/retiring/retired investors.
Quality Investing
Some investors investment preference can sometimes be classifies as quality investing. This is a sort of hybrid approach in which the investor is searching not for questionable companies at bargain prices or exceptional companies at outrageous prices, but good companies at good price. This strategy relies on a combination of quantitative and qualitative factors which we will discuses in another edition of our series. Quality investors rely on a fairly simple investment strategy that can benefit any investor interested in identifying good values. They look for great stocks, then buy them and hold them for several years or more. The trick here is to look at your investment as if you were buying a piece of a business, not just shares of its stock. In this sense, the management of the underlying company is an important criterion in the investment decision. In this regard, the value of the business is determined by totaling the net cash flows you expects to occur over the life of the company and discounting them by the appropriate interest rate. You may add a premium based on the risk involved in the particular investment. The focus here will be on return on equality, operating margins, debt levels and capital expenditures to identify the best investments. Quality investors believe that diversification is less necessary for those able to confident will signifying a few good values is far more important than spreading invested money across a typical diverse portfolio.
Growth At a Reasonable Price (GARP) Investing
It is often difficult to choose between the value and growth approach to investing. If you can not choose between the growth approach to investing in stocks and the value approach, then you might want to consider what in advance market is referred to as the “GARP” approach. GARP stands for growth at a reasonable price. Accordingly, GARP investors invest in companies with growth potential whose stock price is under valued. This as you can imagine is a difficult task since growth and value stock tends to have opposing characteristics, but it’s not impossible. Also you can make a huge amount of money if you get it right.
Value Investing
Value investors look for stocks that are selling at an attractive price; in other words, they are bargain hunters. This does not means that value investors buy stocks because they are “cheap” (such as penny stocks); value investing utilize several measure of a company’s value to identify stock that can be purchase for the less money than the worth, regardless of whether they are worth 10 Naira or 100 Naira. Although its impossible that a growth stock could represent a good value, growth investing and value investing are usually consider opposing strategies. This is because value investors tends to focus on traditional valuation metrics such as the P/E ratio, looking for low ratios which are typically not found in growth stocks. Value stock often are ones which are fallen out of favor with the investment community for one reason or others, perhaps because they are in a slumping industry or because they are reported poor earnings
Growth Investing
Growth investors focus on one aspect of a company: is potential for any growth. They believe that the companies with high earnings growth will see their stock price continue to increase, since investors will want to own profitable companies that can pay large dividends in the future. The number that they pay the most attention to earnings per share, especially how it changes from year to years, although the sometime look at revenue growth as well. Some investors also compare the price/earnings ratio with the annual earnings growth, to get a feel for how much the market is willing to pay for a given rate of earning growth. Growth stocks tend to be from young companies, so they are often riskier than the average stock. They have the potential to large gains, but they also have the potential for large losses.
Market Timing
Market timing is essentially the opposite of buying and holding. Market timers believe that it is possible to predict when the market, or certain stocks, will rise and fall. It therefore makes sense to buy when the markets are low and so sell when they are high in order to maximize profits. Marketers can use any number of different methods for timing the market-technical analysis, fundamental analysis, market rumors or even intuition. Most experts agree that market timing is incredibly difficult if not downright impossible. They also warn against it, because it is hard to sale when the market or particular stock is high or low. Often a seemingly low stock will go lower. Moreover, commission eat away at your profits when you trade frequently, especially on small transactions. In the long run, the market goes up. Unless you are a superb timer, you will do better staying fully invested at all times.
Buy and Hold
The “buy and hold” approach to investing in stocks is predicated on the assumption that in the long term stock prices will go up. According, since the average investor does not know what will happen tomorrow the best thing is to buy fundamentally good stocks, ignore short term vacillations in their prices and keep them for many years. This is often the case in emerging markets where the scope for growth is usually faster and in line with risk which is usually higher. Historical data from the Nigeria Stock Exchange supports this claim. The logic behind the idea is that in a capitalist society, the economy will keep expanding, so profits will keep growing and both stock dividends, other corporate actions and consequently stock prices will increase as a result. There may be short term fluctuation, due to business cycles or rising inflation, but in the long term this will be smoothed out and the market as the whole will rise. There are also additional benefits to the trading commissions which will be a lot lower than if transaction occurred more frequently. Under this strategy, the investor after completing in –debt research and analysis buys fundamentally good companies and hold them for several years. One weakness of this strategy is that it assumes that growth is infinite and that historical stock-return data provides valuable guidance for predicting long-term stock returns.
