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  1. 2 points
    (Originally posted: 5/10/2013) image: sporadicpieces.wordpress.com I hope you like the picture above. Well, I love it! It depicts the exact state I'm in: surfing the Nigerian Stock Market wave. Since 2008, the Nigerian Stock Market has been a tumultuous wave, wiping out investors and crashing portfolios. I lost all my savings too in 2008, but mine was a sadder case. I bought into the First Inland Bank public offer at N9.50 and they didn't send me a share certificate, I went to the Registrars and they couldn't locate my name in the records. My investment was gone forever, even if the market goes bullish again and the share prices double the pre-crash period, I stand to gain nothing. I was better off falling for those ponzi scams, the very ones I diligently avoided by buying shares myself. But I took it as a challenge and armed myself with finance and investment knowledge, reading over 10 books by finance professors and investment gurus. I came back, I saw and I won back all my loses. And now I'm just surfing the waves. So how do I pick winning stocks?In Nigeria, with the desert like state of the NSE; picking the right stock is extremely easy. And I will show you how. 1. Get a Punch Newspaper.Yeah, you heard me right. Get a Punch Newspaper. Turn to the NSE price list page, and write out all the stocks that traded over a 100,000 units that day. Then get 4 other Punch Newspapers, each for an entirely different month. Do the same thing for each. Now write out all the stocks that appeared in all your lists.The reason for this is you wouldn't want to be the big guy, the one moving the stock prices by your quotes. You would want to buy into companies that are very active on the NSE, companies with very liquid stocks, companies you can buy into or sell out of within a day and without causing a tsunami.2. Get their 5 years Annual ReportsIf you've been reading investment books or foreign blogs, you'll think 10 years is the ideal number. Well, you'll need to contact an Investment firm to get the 10 years annual reports of any Nigerian company, you won't find them online. So that's why I use 5 years. You can get recent Annual reports on my Slideshare Account 3. Do some AnalysesNow that you have the Annual Reports, you have to do some quick analysis to vet the list you have. You'll be crossing out all companies that have not grown Revenue year on year by at least 15%. Then you'll proceed to crossing out companies that have not grown profit year on year by at least 15% You'll also cross out companies that have not grown Earning per Share year on year by at least 10%You'll also cross out companies that have Return on equity of less than 10% Why? You might ask.Nigerian economy has been growing at over 6% Even terribly run companies in Nigeria have benefited greatly from this growth and manage to produce good looking annual reports.The Money Market will provide you about 12% rate of return on your money, and sort of risk free too.And if you are the patient type, you can get 15% buying Nigerian Government bonds (well, if you are not like me, I avoid any dealings with the government and wouldn't even rent my house to a government official). The only way the trouble of investing in NSE can be worth it is if you stick with my recommendations. There will be companies that will meet the strict requirements, Nigeria's economy is booming. 4. Vet the Income Statement, Balance Sheet Statement, Cash Flow Statements and Notes.By now you'll be down to a couple of companies, usually less than 10. For this process, you will need some knowledge of corporate finance and accounting.I use the data in the Balance sheet to rewrite the Income statement, the Profit and Loss statement. Then I use the data in the cash flow and notes to determine if there was any creative accounting done, the type of accounting I hate. This stage is the most critical, I have lost money in Oando because I didn't do this stage then. I simply swallowed the numbers in the annual report, I didn't know how to vet them. I later went for an online accounting and finance course, read all the books I could find/afford. Now I don't fall for creative accounting anymore, if you're feeding your growth with loans I will cross you out (I sold my shares in a company recently because they were doing so). In the end, the few stocks that will make it through will be just the ones worth your investment. 5. Buy at the right price.Now that you've identified the stocks to invest in, what's left is to buy now or wait for the right time. And in the current state of the NSE, this is one decision you'll find very hard to get wrong. I use a crude DCF calculation to determine the intrinsic price of the stocks that made it this far, and I apply a margin of safety that is very flexible. I will be explaining more on this part of stock investment later on in my Investment series. But a quick check is to not buy a stock that is selling at about 20 P/E ratio in Nigeria. You'll be paying an exorbitant price for the growth component.
  2. 2 points
    (Originally posted: 02/09/2013) Have you ever tried googling Personal Finance in Nigeria?Here is a screenshot of what you'll likely get - Nothing very useful or relevant. The seemingly relevant results Involve Your Spouse In Your Personal Finance by PM News and What You Need To Know About Personal Finance by Nigeria Village Square are ramblings. Nothing wholesome. So I decided make the ultimate Personal Finance guide for Nigerians living in Nigeria, like me. What is Personal Finance?Though I nearly always go with Investopedia's definitions, this time around I think Wikipedia is more on point. But we can always combine the two to get a more illustrative definition. And here it is -Personal Finance is the sum total of all financial decisions and activities of an individual (or family) in managing his financial resources, with a view of both the present and the future. It will include budgeting, savings, investment and provision for emergencies. The truth is we all do personal finance, one way or the other. We make money and we spend the money. But we are all faced with the challenge of making the most of every Naira we earn. We seek advice from friends, colleagues and strangers. We try everything we consider reasonable. And all we ever get is an improvement, not a solution. But I have found the solution, studied it and practiced it. And in this post, I'll be sharing it with you. The sure way to make your money work for you just as hard as you did for it. Know ThyselfMy favorite quote is by Socrates and it's - The unexamined life is not worth living.It's true not just for the entirety of our lives, but also for every endeavor we embark on. If you want to manage your finances well, the first step is examining your finances. Know all about it. Know how much you make and know how you spend over a convenient period. The period could be monthly if your main income is a monthly salary, and it could be quarterly if you run your own biz. What matters is knowing yourself, financially. In 2011, I had serious money issues. I got a dream job. I lost the dream job. I made over N12,000 per day + regular salary (~ N500,000/month) for over 2 months. I got robbed. I traveled for French language immersion. I got a new job. My living expenses were eating my salary. I was working and my bank account balance was de-growing month on month. I thought I needed deliverance, a special all night deliverance session preferably at Redemption City or Prayer City. I was working hard and had no money to show for it. I had been reading investment and personal finance books for a long time then, but I never thought anybody would experience what I experienced that year. That year I learned that experience is truly the best teacher. I had to translate all my book knowledge to working knowledge. I started tracking my expenses daily for months to get a good idea of my average monthly expenses; since I had just one income source, my monthly salary, figuring out how much extra I have left at month end was extremely easy. I proceeded to drawing up a budget, a monthly one. Be Your Own AccountantHere is another popular saying. N100 income, N99 expense; result is happiness. N1,000,000 income, N1,000,001 expense; result is misery.If you've ever been cash-strapped, you will better understand that quote. It doesn't matter how expensive your car or mansion is, if you bump into an egg seller and ruin a crate of egg, only cash can save you.While managing your finance, forget about your assets - how much you are worth, how much your car is worth or that project you're going to win. What matters most is what you have in cash now and making sure you don't spend beyond that. You have to be your own accountant. Make your own budget. Now that you know the average amount (you can never know the exact) you spend monthly and how much you earn monthly, note the extra, your real disposable income. I call this your free cash. If yours is in the negative (your monthly expenses are more than your monthly income) then get a new job or downgrade your lifestyle or do both. And if your run your own business and your income comes once in 3 months or more, make your budget period a quarter (3 months), so you don't get emotionally overworked when you see all the payments owed you monthly.Now that you have calculated your monthly free cash (income - expense). You will need to learn how to max out that free cash, reduce your expenses to a convenient minimum (I don't recommend cutting down on feeding expense or personal care, except you want to save for your grand-kids or the bank) and work on increasing your income. Growing your IncomeLet's start with the easiest way to accumulate wealth: Grow your Income.There are two ways of doing this and they are not mutually exclusive, you can do both. The first is to write your boss for a pay raise or get a better paying job. And trust me, asking your boss for a pay raise is much easier than you think. It starts with letting your boss know that you need a pay raise or more performance bonus in very subtle ways. In my second job, I was always making jokes about how broke I was and made sure my boss noticed. Later, he got sick of it and called me aside and gave me a very touching finance advice, how he started like me and had similar money troubles and steps I could take to better my situation. Though I didn't get a pay raise, I got a performance rating of 110% because he knew I seriously needed the performance bonus. Then I changed job. The second way is to get multiple sources of income. For some time, my only income source was my monthly salary. When I lost my job in 2011, I lost my only source of income. It was devastating. Since then, I made up my mind to have multiple income sources. I searched within me for skills I could monetize, then looked around for needs I could meet and charge for. It was extremely difficult. At first, instead of making more money to supplement my salary, I was losing money and getting broke. Somehow, this difficult period brought out the genius in me. I became the CEO of a startup, me. I started 4 businesses in less than 2 years and lost money printing biz cards and looking for clients. But my 4th business became the ONE. I found my ideal part-time biz, something I would gladly do for fun but I now charge for. Here is the story of my journey to this discovery. And like they say, fortune favors the dogged. After some time, I started getting paying clients and began earning a little here and a little there. You too can start a part-time biz, and increase your sources of income. Shrinking your ExpenseThis is the trickiest part. You can never feel you've done enough. But this is what I suggest you do. Look at your daily expense list (the one you made to get an idea of your average monthly expense) and strike out those recurring expenses you can do without or you are better off without. Try hard to avoid making such expenses again. Look at the expenses you can optimize, maybe stop drycleaning all your clothes and eat out less. And if you are the scavenger type (no offence intended) you could stop driving your car to work and hike, take your lunch to work and use your friend's call bonuses. You can get more tips from the NSD, LSD & HSD section of my Working your way to wealth post. Maxing out your Free CashNow you're working on growing your Income and shrinking your expenses, and want to know how to max out your Free Cash.This is the heart of Personal Finance, the making your money work for you part. This is how you max out your Free Cash, step-wise: Have an Emergency Fund. Investopedia is on point on this. This is a savings account that is used to set aside funds to be used in an emergency, such as the loss of a job, an illness or a major expense. The purpose of the fund is to improve financial security by creating a safety net of funds that can be used to meet emergency expenses as well as reduce the need to use high interest debt, such as credit cards or loans. It's recommended that you put 3 to 6 months living expenses in it. Now that you know your average monthly expense, half the job is done. In mine, I have my 4 months living expense. And I use Diamond bank's High Interest Deposit Account (HIDA) due to their above peer interest rate. You could use Standard Chartered too. Just make sure you use a bank, not an investment account or cooperative; easy accessibility to the fund is key. That's why it's called an emergency fund. I have had to draw from mine thrice -- when I changed job again, a serious family need and a sudden business expense. Each time I draw from the account, I pause all my other monthly investments and replenish the account. This is very important. Don't break the rule. Your emergency fund before any other, except debt servicing. Depreciation, Depletion and Amortization. You've always been the CEO of your life but from now on, you will also be the CFO. There will be some expenses that are not monthly, e.g. yearly house rent, wardrobe uplift every 6 months... You get the idea. You have to spread their cost over your budget period, monthly. Don't forget services you're enjoying that you will start paying for in the future, and plan for future one time expenses like buying/building a house. You can open a high interest savings account or money market account and save towards those expenses every month. Monthly Savings or Investment. Once your Emergency Fund is set up and impending future expenses are being saved towards. You can set up a direct debit or standing order to transfer a portion of your remaining free cash to a fixed deposit account, money market account, mutual fund account or brokerage account monthly. This will make saving/investing automatic for you, and in the finance world it is called Paying Yourself First. This is the crux of making your money work for you. And the investment vehicle you choose will be based on your risk tolerance and knowledge. I transfer money monthly to a Mutual Fund account and my brokerage Account. Don't Ever Run Out Of Cash (DEROOC). Definitely, there will months unexpected expenses will pop up or a financial emergency. Thankfully, you have an emergency fund. But the point is, those emergencies shouldn't be monthly. Don't put all your money, after building up the emergency fund and saving towards future expenses, in an investment account. Always have about 30% of your living expense as a reserve on top of the actual monthly expense budget. So if you earn 250k monthly, spend 100k monthly and you have 150k left, and assuming your emergency fund is already set up (500k); you may want to put all the 150k left in your special savings account and investment account, but that will be very bad. Because an increase in food price will become an emergency and you will have to start touching accounts you shouldn't. So have at least 30k out of the 150k left in your salary or regular account. Life will be easier, at least financially. And that's how to max out your free cash. We have come to the end.
  3. 1 point
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  4. 1 point
    (Originally posted: 29/09/2012) I hope you've read my I need more money post, where I talked about how I live from payslip to payslip.You see, I'm one of those guys who find it nearly impossible to have a savings. I only save to buy some fancy gadget, I find it extremely hard to stash away cash just for the sake of having a savings. I can barely do that for more than two months, 'cos every night my mind will keep coming up with auto-suggestions of what to do with the money. What ruinous mind I've got! So, how do I get the best out of my salary?Well, everything with a bad side definitely has a good side too. Fortunately for me, my mind that makes it hard for me to have a savings also made it extremely easy for me to pursue a wholesome lifestyle, one that is devoid of (nearly) all bad habits I know. So, I end up spending money on just the real necessities of life and one luxury hobby (Swimming). The only time I spend money unwisely is when I have a savings.At the onset of my working career I tried saving and ended up plunged into a vicious loop of living frugal in the middle of the month and extravagantly after pay-day and the beginning of the month. And believe me, I really tried to break out of the loop but it seemed beyond me to accomplish. But with the help of my hard-working, though still ruinous mind, I found a great workaround. I found out that I love taking risks. My first swimming experience was in a big river; I put (nearly) an entire year scholarship grant into stocks (and happily lost all); spent my entire free cash after school on a DSLR camera right in the heat of my job search; went to Cotonou for a one-month French language immersion without having any contact there (and got robbed too)... And I'm mighty proud of taking those risks, without the tiniest feeling of remorse. So back to the main question - how I get the best out of my salary?It is very simple, yet powerfully more rewarding that saving. I surfed my risk-sea life, I opened a Mutual Fund account and automated a monthly contribution to it right in the middle of the Nigerian stock market crash. And you bet, I lost money again. But I won't trade it for a 12% annual interest rate savings account.And I didn't stop there, I bought books on financial investments and how to make a kill in the stocks market. So, now I have a self-managed stocks account where I put my extra cash. And believe me, just watching my portfolio go up and down has brought new delight to my weekdays. And I've been learning mighty fast about the investment world, in fact, I recently worked my portfolio up from a 10% loss to a 10% growth and in a bear market too.I invest based on Benjamin Graham & Warren Buffet's value investing principle. I went through all the companies listed on the Nigerian Stock Market, through their 5 years financial reports (couldn't get their 10 years reports) and sieved out the ones that kept growing their Equities, Earnings, Profits and Return on Investment Cash. Then I read extensively about their management, market position, industry trend and their future plans. I was able to narrow down to 4 companies (GTBank, Dangote Cement, UPL & Oando) in the entire NSE list at first, and now only 2 companies (GTB & Dangote Cement) are left standing in my value portfolio. I put 80% of my investment cash into my value portfolio and 20% in a speculative portfolio (Nestle & GSK). So now, I basically spend a fixed portion of my salary on real necessities and swimming, then put the free cash in my Mutual Fund account and Stocks Account. Problem solved.I recently sold one non-performing mutual fund I opened with Stanbic IBTC to cater for an emergency that arose with my job change last month. So, I still get the benefits of having a savings without the vicious loop it sends my mind on. Voila! That is how I get the best out of my salary.
  5. 1 point
    (Originally Posted: 26/10/2016) I spent the whole of yesterday working on a mini model of my stock analysis web app, creating it from scratch in Power BI. And finally, I've got the good news -- I am done with the Power BI model and you can test-drive it. The data are valid, spent months compiling them. If you want me to share it fully with you, send me your email and I will add you from the backend. You'll get an email invitation to fully access the model dashboard, make edits on your own copy and analyse Nigerian Stock Exchange listed companies. If there's any analysis or modifications or suggestions you'll like to see me make to it, do let me know. Maybe, it looks too simplistic or no predictive analysis included or no technical analysis included. The underlying data took me months to compile and verify, the backend mashup was no small work too (PowerQuery to mashup 60+ different tables -- unpivoting, handling missing values, creating relationships e.t,c.). You can view the entire model here. Do try it and let me know your feedback. You can analyse any combination of companies you want. Use the slicer/filter on the left.
  6. 1 point
    (Originally posted: 5/1/2014) Since I began my Investment and Finance self-study in 2011, I have read lots of books. And they have all helped me, and not just in making sense of the investment world, but also in becoming a better person. The truth is, those books added to my age. They gave the understanding of a much older man. The cool thing about Investment, Economics and Finance is that they show you the core of most of our decisions, because we are always making choices among limited options and resources. Everybody knows that an investment scheme that promises you too much returns, like doubling your money in a short time, is fraudulent. The trouble is that most of us don't know when a lot becomes too much and suspicious, and it's worse when we see friends and family making mouth-watering profits. Only a good grasp of Finance can enable you know when a lot is too much and when a return is unsustainable. We all face traffic jam in Lagos. And lots of us have our own theory of how to beat the traffic. But a good knowledge of Economics will help you make the most of the situation. Knowledge of Finance, Economics and Investment will help you to know if you should buy a land and build a house now, or later. It will help you to know what trend is safe to follow and the one that will almost wreck you. And the best part is -- you get to see your predictions, small and big, come to pass. Because there will always be some future realities that will jump at you. Just like when a man on a hill observes loggers felling trees, because of his privileged position on a hill-top, he will be able to predict a lot of things. And that's what sound knowledge of Finance and Economics does you, it places you on a privileged platform, high enough to see what others won't see. image: china.kylereed.com So here are the Investment and Finance books I have read: Economics for Investment Decision Makers: Micro, Macro, and International Economics (CFA Institute Investment Series) by Christopher Piros and Jerald Pinto The Book of Investing Wisdom by Peter Krass One Up on Wall Steet by Peter Lynch Financial Modelling by Simon Benninga Finance by Ehsan Nikbakht Berkshire Hathaway Letters to Shareholders by Warren Buffett Security Analysis: The Classic 1940 Edition by Benjamin Graham The Warren Buffett Way by Robert Hagstrom A Random Walk Down Wall Street by Malkiel Burton The Five Rules for Successful Stock Investing by Pat Dorsey and Joe Mansueto Too Big to Fail by Andrew Ross Sorkin Lower Your Taxes by Deaver Brown Personal Finance by Deaver Brown Jim Cramer's Real Money by James Cramer Rule #1 by Phil Town Corporate Finance by Ivo Welch How to Build a Financial Model by Sol Hong The funny thing is I've always thought I have read close to a hundred books on investment. I'm very sorry if I have told you that I've read close to a hundred books on investment. It was a sincere lie; one I believed myself. If you are just starting out, I'll advise you start with Rule #1 by Phil Town and Corporate Finance by Ivo Welch.
  7. 1 point
    (Originally posted: 27/10/2013) In this post I'm going to revisit Compound Interest. It makes all the difference in the investment world.With a working knowledge of compound interest, all you'll need to become very rich is just lots of time and no (very) bad luck (you don't even need good luck). And I'm telling the unvarnished truth. image: dominatethegmat.com Compound interest is when your interest generates interest. When every naira you gain works as hard as your initial investment, to make you another naira. And it's the most profitable knowledge in the world of finance, if used right. If I invest N1,000,000 at a simple interest of 10%, after 20 years I'll have N3,000,000.If I invest the same N1,000,000 at a compound interest of 10% for 20 years. I'll have N6,727,500.The difference is a whooping N3,727,500! How do I apply that in my day to day investment life?If I'm to pick between a 10 year FGN bond with a coupon rate of 15% and a face value of N1,000 selling at par (at par means at full face value, in this case, N1,000); and GTB shares at N25 per share, dividend rate of 7% and dividend growth rate of 10%. It's only the understanding of compound interest that will enable me make a good comparison.N1,000,000 invested in the FGN bond will equal N1,000,000 gotten when the bond matures in 10 years + N150,000 paid to me every year for 10 years. Totaling N2,500,000. The interest I get is simple interest.If I invest the same N1,000,000 in GTB shares at N25 per share. I will get dividends worth N1,274,994 in the same 10 year period. And if GTB shares are still selling at same N25 after 10 years. My total cash flow on sale of the shares will be N2,274,994.As you can see, I'm able to translate the two different investment opportunities into numbers I can compare more reasonably because I understand compound interest.In this case, I know that investing the N1,000,000 in GTB makes the better sense. GTB has a market beta of less than 1. It will take an unprecedented catastrophe to make the share price remain at N25 after 10 years. And I have used highly conservative assumptions. GTB's actual dividend growth rate has been more than double the rate I used in this example. Though, I'll incur more transaction costs in buying and cashing out of the GTB shares than FGN bonds, it's insignificant compared to the sure part of the gain in sight. Now that's fairly complex. But that's how it works in reality. Nearly everything builds on your working knowledge of compound interest. A working knowledge of compound interest is very vital. Whenever you are presented with an investment opportunity, the first question you should have answered is whether the returns are in any way compounded or not.If I'm to pick between a quarry business and a pure water business. I'll be less excited about the quarry business. The quarry has a fixed output (like the FGN 10 year bonds), I can't increase the absolute output by reinvesting my earnings into the business. It's like a simple interest investment. But I can easily increase the quantity of pure water I pack (for almost forever) by reinvesting my earnings in the business. This is the business version of compound interest. But it's often referred to as scaling. Ability to increase your turnover without having to start from scratch [again]. Finally, compound interest changes the way you think. It makes you understand the time value of money. I prefer calling it the money value of time. All you need to become a millionaire is not a huge salary someday, it's prudent investment today. Because with compound interest, N100,000 becomes N1,000,000 in few years if you find great investments.
  8. 1 point
    (Originally posted: 8/10/2013) Welcome to my series on Stocks Investing, with a special focus on the Nigerian Stock Exchange. I will take you through all you need to be financially literate enough to do your own investment analyses. I will teach you finance principles that will help you even in your day-to-day life. I will breakdown the finance terms you often hear about but have no time to read up on.I will use lots of illustrations from real events and our daily encounters. I will guide you through the beautiful world of corporate finance, and by the time you'll be reading my 100th post in this series, you'd have become a finance guy. Finance is such an important part of our lives, and the knowledge of finance has huge benefits. Finance is all about value. Making the most of the limited financial resources you have. Whether you run a Fortune 100 company, or you run a family business, or you run only your life; your success depends largely on how you manage the money involved. Knowledge of finance will help solve all your money problems. And I'm not exaggerating. I would have loved to start with what most finance books start with: The Law of One Price. But this is not a finance book written for students hoping to get an MBA or a Finance degree. This is a guide, written to make Engineers, Doctors, Business men, busy professionals and artisans, become so good in finance that they would be able to handle their money issues professionally. So I will be starting with the next bedrock principle, Time Value of Money. And I strongly believe that this is the most important finance principle. An understanding of this principle will radically change your life. image: swlearning.com Time Value of Money (TVM) TVM states that 1 naira today is always worth more than 1 naira tomorrow, due to its earning potential. We've all opened a savings account before, and we are familiar with the term - interest rate. Now, what you're probably not familiar with is that your savings account interest rate is calculated (compounded is the true financial term) daily. Though, you saw the rate as per year (annualized), and you get end of month alerts of interest paid; it's actually compounded daily. Every naira you have in your savings account is growing daily, though very slowly. If you borrow a friend 1 million naira today to be paid back in a year's time, you'll be losing the interests that one million will accrue in a saving account. And that's not all, by the time you get the 1 million back, it won't be worth the original 1 million you gave him; it would have lost it's purchasing power. The plot of land you could have bought with that 1 million will no longer be selling for 1 million when he pays you back. And that's what the Time Value of Money helps you understand in a more structured way. You should see money in its Net Present Value, what it's worth today. In all your future transactions, look at the money involved in its NPV. Net Present Value (NPV)NPV is simply factoring in TVM in all your financial transactions, putting all financial transactions in the same context; today. Am I better off accepting 1 million naira today or 1.2 million naira next year? If I have a business that can turn the 1 million naira to 2 million naira in 1 year, then I'm better off accepting the 1 million naira today. But if the most I can do with the 1 million naira is to put in a fixed income account at 15% per year; I better go for the 1.2 million naira to be paid next year. And that's worth the knowledge of NPV does. It helps you to think critically about your risk-free rate of return. Risk-free* Rate of ReturnThis is the earning power of your 1 naira that is guaranteed; risk-free. It's the biggest selling point of a fixed income account. The bank offering the service will try to assure you that the rate of return is certain, risk-free.So, if I'm guaranteed 200,000 naira for every 1 million naira after a year. My risk-free rate of return is 20 kobo for each 1 naira; 20%. This means that every 1 naira I have now is a guaranteed 1.20 naira in a year's time (TVM). And that whatever investment I want to make should be able to give me more than 1.20 naira for each naira invested. Each 1.20 naira next year is same as 1 naira this year (NPV). By just fixing my 1 naira and forgetting about it, I am guaranteed a 1.20 next year (Risk-free rate of Return worked on it). And we have come to the end of Finance 101. Make sure you subscribe to my blog to receive the next post risk-free!*Risk-free is a theoretical term, in reality no investment is risk-free. Very soon we'll discuss risks, and estimating a risk premium.
  9. 1 point
    (Originally posted: 26/11/2013) Oftentimes, we consider buying stocks and bonds as an alternative to leaving the money in a savings account, or a quick way to double our money. We hardly view buying stocks and bonds the same way we view starting a business or partnering with a friend to start a business. In today's post I'm going to set our perspectives right. image: lerablog.org While in the University, whenever a student dies, especially a final year student, we often lament the fact that he was a final year student more than the reality of his death. You'll hear people exclaim, "Oh, after all the years of investment and hard work to get here. And he was just 2 months from graduation. Oh, what a terrible world." We all view the 20+ years of our lives spent in the four walls of a learning institution, reading for and writing exams, as an investment. And it's true. Nowadays, at the age of one, a child begins [pre-]school, moves to kindergarten, then nursery school, then primary school, then secondary school, and finally the University. And some spend close to a decade in the university, doing postgraduate courses after their undergraduate study. And why do we readily do this? Because we see it as an investment. Once in a while, we meet old friends who have gone on their own. They now run their own businesses. You rub minds and they tell you that going on your own is always worth the risk, that the long-term returns and ease of life is better than anything you can get from any company. You begin to consider investing in a business idea you have. You take it so seriously that you begin taking special training, going for seminars, getting a mentor and buying relevant books. And why? Because we know that running a biz is no small task and one needs to build up to it. Unfortunately, whenever we think of investing in the stock market or buying bonds, we see it as a hit or miss venture and not something to take seriously as a masters program or an entrepreneurship course. We hardly read 2 good 600+ pages book on it. We don't take finance courses for the sake of investing in the stock market. Why? We've got the wrong perspective on financial investments. Buying shares is as much a serious business as setting up a Drug manufacturing company. At least, that's how serious I take it. I have my entire life-savings in the stock market, and I'm not a bit worried. Why? Because I see it as a business. I build up to it. I stretch myself more than I did to get my undergraduate degree. For once in my life, I'm putting my head where my money is. Every knowledge I gain is having a direct impact on my [stocks] business. Like a real business, I have had losses and rebounds. I have gone through the basics and history, I have studied for it harder than I did to get my CCNA and OCA. And I know that it's not enough. A business doesn't grow on knowledge. It grows with experience, deliberate plan and actions. And after reading over a century span of great books and MBA finance textbooks, I've found that it's just like being a core Telecoms engineer. You take a long arduous path to becoming one, but everyone outside thinks you're a special being, and that you do magic daily. Or being a doctor; no one even argues with you; you are next to God to a lot of people. And that's the way we all view Warren Buffett and other successful professional investors. The truth is that Malcolm Gladwell is right; you've got to pay the 10,000 hours due to be great in anything. You can't think your way out of it. Knowledge can never take the place of experience. But experience built on the wrong knowledge will take you nowhere. So what is the right perspective on investing?It's a long term thing, like running a business.It requires lots of man hours and brain work, more than doing a masters.It requires sound knowledge of finance, financial accounting and macro-economics.It requires dedication in cash, time and study.And if you think you're fit enough for it, then get a note book and a dedicated pen 'cos I'm going to show you all I know. And be free to look out for faults in them. Above all, you'll find the finance and investment world very interesting.
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