I nice piece I just read at the Nigerian Tribue. Inspiring!
NIGERIAN TRIBUNE - Financial Freedom - Wealth Creation Through Shares
Develop a passion for shares
By Ayeromara Peter
A young man of 23 years came to my office three years ago. He was then a final year student of Lagos State University (LASU). He came purposely to dispose some of his shares so as to pay his school fees and complete his final year projects. When he handed his share certificates to me and the statement of his account in CSCS, the thought that came to my mind was that the young man was one of those bad boys that wanted to sell his father’s shares. On a second thought, I began to ask him a series of questions.
An authentic owner?
The guy answered my questions beyond any doubt that he was the authentic owner of the shares. Still not satisfied, I went to the stock broking firm where he purchased the shares through his CSCS account. All the staff of the stock broking firm testified that they knew him very well. When we calculated his investment in shares as at then, it was over eight hundred thousand naira (N800, 000.00).
The most surprising thing was that the guy was an orphan. The parents died when he was in primary school. This young man, through dint of hard work and discipline, sponsored himself to school up to the university level without any help or support. Despite that, he developed an investment mindset when he was still young. According to him, he started investing in shares since 1997 when he was in secondary school.
Labouring to invest
After school hours, he would go and do menial jobs. The proceeds he would then divide into three; one part for his feeding, another for his education and the last would be used to invest in shares. That was not the end of the story. A kind hearted man who was with us when this man was narrating his story told him not to sell part of his shares. He gave him the one hundred thousand naira he needed. The young men developed a passion for shares even though it was not convenient for him then. He set aside money everyday to buy shares.
You have no excuse, really!
If an orphan like that man could weather the storm to plan for his financial freedom, nobody should have any excuse not to be rich. One thing about money is that, if you are earning five thousand Naira (N5,000) per month and you don’t save, you would not be able to save and invest when you are earning more. This is the reason you see people working in multinational companies with fact pays begging when they are no longer there.
The power of savings and investment
Savings and investing lead to multiplications of wealth. The most interesting thing about investing in shares is that once you start, you become addicted to it. Do you know that most of the richest people in the world made their money in the stock market? Do you also know that individuals, big corporations, multinationals, banks etc invest them surplus in the stock market?
A few examples
Bill Gates of Microsoft made his money through the computer but became very wealthy through investments in shares, bonds and other financial instruments. The computer alone would not make him the richest man alive; he did it by multiplying his money in the stock market. Warrant Buffet the second richest man alive also multiplied his money through shares. Coming back home, the Onosondes, the Ibrus, the Dangotes, Jimoh Ibrahim, Oba Otudeko, the Ojoras, and so many people too numerous to mention invested in and have made money in the stock market.
How much do you want to earn
You must sit down and write down how much you want in next five years. As each year is coming to an end, write your mission statement, your vision for the next year. Write down the amount you will set aside weekly and monthly for shares. For details on how you can become a multimillionaire in a few years by investing, your mission statement, how you can turn your N5, 000 or less monthly in shares by trading profitably in them so as to retire rich, start planning for your retirement in 5,10, 15, and more years. Also, don’t forget to buy a copy of my book, Secrets of Making Money in Shares’. If you read the book, you will not have any reason to be poor again in life.
Showing posts with label investing. Show all posts
Showing posts with label investing. Show all posts
Sunday, May 13, 2007
Thursday, January 25, 2007
Why you lose money in stock markets
A great piece by my friend Mangesh Ghogre and Vivek Kaul. A must read for stock market investors.
Why you lose money in stock markets
Why you lose money in stock markets
March 24, 2005
(reproduced with permission)
It is the investor's dream come true: the Bombay Stock Exchange's Sensex and the National Stock Exchange's Nifty are scaling all-time highs.
In fact, in the last 6 months, both the indices have risen by 18.74% and 19.79% (considering the period from September 21, 2004 to March 21, 2005), respectively. By any standards, the Indian stock markets are witnessing a bull run.
Economic theory tells us that, ceteris paribus, higher prices dampen demand and lower prices increase demand. But when the stock market witnesses a bull run, investors do not behave like normal consumers.
As the stock prices go up, the more stocks appeal to investors. This leads to investor psychology during a bull run that is detrimental to the investor as well as for the market.
No wonder some investors end up making losses. Let us see how.
The herd mentality
Robert Shiller in his book, Irrational Exuberance, says, 'A fundamental observation about human society is that people who communicate regularly with one another think similarly. There is at any place and in any time a zeitgeist, a spirit of times.'
Marketing research has shown that the typical Indian buyer's decision is heavily influenced by the actions of his acquaintances, neighbours or relatives. Psychologically, the desire to conform to the behaviour and opinions of others, a fundamental human trait, is what drives such buying behaviour.
So if everybody around is investing in the stock market, the tendency for potential investors is to do the same. Like sheep in a herd, investors in a bull run find it cozy to be inside the herd rather than outside it.
The Ant Effect
Another interesting observation during a bull run is the order in which investors take decisions. Ants, when they get separated from their colony, obey a simple rule: follow the ant in front of you. Much like the circular mills of the ants, investor decisions are made in a sequence.
People, who invest in the stock market during a bull run, assume that investing in the stock market is a good bet simply because some of the people they know have already done the same and made profits.
Consequently, during a bull run the stock market has more buyers than sellers. Expectedly, stock prices zoom up. Expecting the bull run to continue, more and more investors enter the market, fuelling an even greater price rise and this cycle gets repeated.
Riding the bull wave, stock prices of fundamentally weak stocks also start to go up. Driven by unrealistic expectations, these unsustainable prices soon start to tumble and the bubble eventually bursts.
At times, investors know that the stock they are investing in is fundamentally weak but they are still willing to invest in the stock, because they feel that some greater fools could be depended on to invest in the stock after they have and this would give them handsome returns on their investments.
Greed
Investors are human, after all. So, the lure of quick wealth is difficult to resist. During a bull run, stock markets offer astonishing returns in a short period of time as compared to other investments. This helps in attracting more money into the stock market.
If we look at the present scenario in India interest rates on a six-month fixed deposit with a bank stands at around 5 per cent per annum.
Other investment opportunities like the Public Provident Fund, Kisan Vikas Patra, etc do offer better interest rates, but the investment is locked up for a significant period of time.
If one compares this with investment in an index fund (let us say an index fund that mirrors the BSE Sensex), the six-month return on it would have been a whopping 18.74% (considering the period from September 21, 2004 to March 21, 2005). Given this it becomes very difficult to stay away from the stock market.
Greed also results when investors see people they know making money through investments in the stock market. As Charles Kindleberger wrote (in his all-time classic Manias, Panics and Crashes), 'There is nothing so disturbing to one's well being and judgement as to see a friend get rich.'
This leads to more people entering the stock market without really understanding the market.
Rear view mirror driving
Investors in general, and especially during a bull run, tend to look at the recent past pattern and assume that the future patterns will be identical to the past ones. This is as good as driving a car looking in to the rear view mirror.
A rear view mirror-driven car will not meet with an accident as long as the road ahead of the car is exactly as it is behind the car. This is rarely the case, both on roads as well as in the stock markets. But, when the stock market is on an upswing, the more investors tend to believe that it will keep going up forever.
They mistake probability for certainty. They pump in more money into the stock market and this always does not go into the right stocks.
Mental accounting
Richard Thaller, a pioneer of Behavioural Economics, coined the term 'mental accounting', defined as 'the inclination to categorise and treat money differently depending on where it comes from, where it is kept and how it is spent.'
Research in Behavioural Economics shows that gamblers who lose their winnings typically feel they haven't lost anything. The fact though remains that they would have been richer had they stopped playing while they had won enough.
Investors during a bull run tend to behave similarly. Once they have got a certain return on their investment they tend to plough all their returns back into the market. When such money goes into fundamentally weak stocks, investment essentially boils down to speculation.
In closing
Individual investors, while investing during a bull run, ignore the most fundamental principle of investment: high returns come with high risk.
And in the euphoria to make quick returns, investors forget the risk involved in the stock market investments.
Individuals logically should seek information on where to invest. But most investors do not. Few ask the right questions at the right time and are naïve enough to go with the crowd.
From the point of view of business no one on the Dalal Street has any reason to suggest that the market (or for that matter a particular stock) is overpriced. Investors need to find out.
The greatest damage happens to those investors who buy fundamentally weak stocks when prices have peaked. When the price of such stocks come crashing down the confidence of the investor in the financial system plummets.
Investors become reluctant to part with their money. This in turn hampers the ability of the capitalist system to raise capital for newer ventures. Also the financial market ends up
misallocating resources and it creates unnecessary risk for ordinary citizens.
Investors should remember that bubbles are caused by excess cash coming into a particular investment theme.
Thus, investors during a bull run need to be careful and not put all their eggs in one basket. They need to spread their investment across stocks and if possible stay invested in other assets as well.
Further, an investor should have a good idea of the business of the company he is investing in. Hopefully, this will help him to make an informed decision.
Even as you read this, chances are that you may think: 'This will not happen to me.' And this false notion is at the root of all the problems. So, ensure that your investments are based on strong company and industry fundamentals and not just hearsay.
Happy investing!
Vivek Kaul is Research Scholar, ICFAI University; and Mangesh Sakharam Ghogre is a Mumbai-based freelance writer and a keen observer of the stock markets.
Why you lose money in stock markets
Why you lose money in stock markets
March 24, 2005
(reproduced with permission)
It is the investor's dream come true: the Bombay Stock Exchange's Sensex and the National Stock Exchange's Nifty are scaling all-time highs.
In fact, in the last 6 months, both the indices have risen by 18.74% and 19.79% (considering the period from September 21, 2004 to March 21, 2005), respectively. By any standards, the Indian stock markets are witnessing a bull run.
Economic theory tells us that, ceteris paribus, higher prices dampen demand and lower prices increase demand. But when the stock market witnesses a bull run, investors do not behave like normal consumers.
As the stock prices go up, the more stocks appeal to investors. This leads to investor psychology during a bull run that is detrimental to the investor as well as for the market.
No wonder some investors end up making losses. Let us see how.
The herd mentality
Robert Shiller in his book, Irrational Exuberance, says, 'A fundamental observation about human society is that people who communicate regularly with one another think similarly. There is at any place and in any time a zeitgeist, a spirit of times.'
Marketing research has shown that the typical Indian buyer's decision is heavily influenced by the actions of his acquaintances, neighbours or relatives. Psychologically, the desire to conform to the behaviour and opinions of others, a fundamental human trait, is what drives such buying behaviour.
So if everybody around is investing in the stock market, the tendency for potential investors is to do the same. Like sheep in a herd, investors in a bull run find it cozy to be inside the herd rather than outside it.
The Ant Effect
Another interesting observation during a bull run is the order in which investors take decisions. Ants, when they get separated from their colony, obey a simple rule: follow the ant in front of you. Much like the circular mills of the ants, investor decisions are made in a sequence.
People, who invest in the stock market during a bull run, assume that investing in the stock market is a good bet simply because some of the people they know have already done the same and made profits.
Consequently, during a bull run the stock market has more buyers than sellers. Expectedly, stock prices zoom up. Expecting the bull run to continue, more and more investors enter the market, fuelling an even greater price rise and this cycle gets repeated.
Riding the bull wave, stock prices of fundamentally weak stocks also start to go up. Driven by unrealistic expectations, these unsustainable prices soon start to tumble and the bubble eventually bursts.
At times, investors know that the stock they are investing in is fundamentally weak but they are still willing to invest in the stock, because they feel that some greater fools could be depended on to invest in the stock after they have and this would give them handsome returns on their investments.
Greed
Investors are human, after all. So, the lure of quick wealth is difficult to resist. During a bull run, stock markets offer astonishing returns in a short period of time as compared to other investments. This helps in attracting more money into the stock market.
If we look at the present scenario in India interest rates on a six-month fixed deposit with a bank stands at around 5 per cent per annum.
Other investment opportunities like the Public Provident Fund, Kisan Vikas Patra, etc do offer better interest rates, but the investment is locked up for a significant period of time.
If one compares this with investment in an index fund (let us say an index fund that mirrors the BSE Sensex), the six-month return on it would have been a whopping 18.74% (considering the period from September 21, 2004 to March 21, 2005). Given this it becomes very difficult to stay away from the stock market.
Greed also results when investors see people they know making money through investments in the stock market. As Charles Kindleberger wrote (in his all-time classic Manias, Panics and Crashes), 'There is nothing so disturbing to one's well being and judgement as to see a friend get rich.'
This leads to more people entering the stock market without really understanding the market.
Rear view mirror driving
Investors in general, and especially during a bull run, tend to look at the recent past pattern and assume that the future patterns will be identical to the past ones. This is as good as driving a car looking in to the rear view mirror.
A rear view mirror-driven car will not meet with an accident as long as the road ahead of the car is exactly as it is behind the car. This is rarely the case, both on roads as well as in the stock markets. But, when the stock market is on an upswing, the more investors tend to believe that it will keep going up forever.
They mistake probability for certainty. They pump in more money into the stock market and this always does not go into the right stocks.
Mental accounting
Richard Thaller, a pioneer of Behavioural Economics, coined the term 'mental accounting', defined as 'the inclination to categorise and treat money differently depending on where it comes from, where it is kept and how it is spent.'
Research in Behavioural Economics shows that gamblers who lose their winnings typically feel they haven't lost anything. The fact though remains that they would have been richer had they stopped playing while they had won enough.
Investors during a bull run tend to behave similarly. Once they have got a certain return on their investment they tend to plough all their returns back into the market. When such money goes into fundamentally weak stocks, investment essentially boils down to speculation.
In closing
Individual investors, while investing during a bull run, ignore the most fundamental principle of investment: high returns come with high risk.
And in the euphoria to make quick returns, investors forget the risk involved in the stock market investments.
Individuals logically should seek information on where to invest. But most investors do not. Few ask the right questions at the right time and are naïve enough to go with the crowd.
From the point of view of business no one on the Dalal Street has any reason to suggest that the market (or for that matter a particular stock) is overpriced. Investors need to find out.
The greatest damage happens to those investors who buy fundamentally weak stocks when prices have peaked. When the price of such stocks come crashing down the confidence of the investor in the financial system plummets.
Investors become reluctant to part with their money. This in turn hampers the ability of the capitalist system to raise capital for newer ventures. Also the financial market ends up
misallocating resources and it creates unnecessary risk for ordinary citizens.
Investors should remember that bubbles are caused by excess cash coming into a particular investment theme.
Thus, investors during a bull run need to be careful and not put all their eggs in one basket. They need to spread their investment across stocks and if possible stay invested in other assets as well.
Further, an investor should have a good idea of the business of the company he is investing in. Hopefully, this will help him to make an informed decision.
Even as you read this, chances are that you may think: 'This will not happen to me.' And this false notion is at the root of all the problems. So, ensure that your investments are based on strong company and industry fundamentals and not just hearsay.
Happy investing!
Vivek Kaul is Research Scholar, ICFAI University; and Mangesh Sakharam Ghogre is a Mumbai-based freelance writer and a keen observer of the stock markets.
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