Common mistakes investors must avoid
By Ayo Olesin, Punch
The wealth of the world’s richest men is usually tied to the value of the stocks they hold, so it was no particular surprise that the Mexican investor, Carlos Slim, displaced Microsoft’s Bill Gates as the world’s richest man a few days ago on account of a recent 27 per cent surge in the share price of Latin America’s largest mobile phone network, America Movil.
Slim holds a 33 per cent stake in the firm and he is now worth about $67.8bn compared with Gates’ $59.2bn.
Such tales of immense wealth built on investments in companies are largely fascinating and it is the big investors, like Slim and institutional fund managers that make the news usually because of the size of their investments and returns.
But there are millions of others that have built relatively modest riches on account of investments in stocks of both small and large companies, and the potential for small investors to make huge returns in companies that are not even heavily capitalized or liquid is always there.
The advantage a small investor has really is that he has all the time in the world to research and focus on companies that will deliver value and superior returns over time, compared with fund managers who are under pressure from clients to perform.
Unfortunately, this is not usually the case, as small investors tend to follow the bandwagon, placing their bets, based on sentiments, in shares rising in value rather than seek out undervalued companies.
However, for an investor to avoid being lumped in the group of underachievers and boost potential for high returns over time, there are a few common mistakes, which must be avoided.
The first is market timing. This simply means being able to predict how share prices will move within a short time frame so the investor can buy low and sell high.
If this were possible, all investors would be rich in no time. Experts point out that stocks behave in a random manner within a short time frame with prices swinging up and down for no apparent reason. Monitoring stock price movements on the Nigeria Stock Exchange for just a week will prove this.
Any investor that tries to time the market could actually make some quick gains, but also make equally quick losses since his actions are made at random and there is no underlying strategy.
It is always better to focus on investing in companies that are selling at a significant discount so that expectations of good returns are realized.
Another mistake small investors make is discountenancing the cost of making trades. Fund managers and stock brokers are in the business of making money through the fees they charge. The beauty of their business is that they make money whether you buy or sell shares. Fund expenses, trading commissions, account management fees, and the spread between bid and ask prices on stocks are money spinners for such institutions and if there is any profit left after trading on your account, the government still collects its cut in withholding tax on dividends.
So any discerning small investor should always be aware of fees or commissions that come with trades, which effectively translate into lower returns for the investor. It is advisable to hold onto stocks that are performing. What real gains could be made in selling off shares in Zenith Bank to buy UBA, for example, when both companies are in the same industry, with similar market capitalization and growth potential? However, some fund managers will not hesitate to do that since they will get their cut.
Looking beyond the hype helps an investor avoid serious losses. Investors in the infamous Dot.Com bubble can attest to this. Many people bought heavily into Internet firms that sprang up about a decade ago, in an industry where business models are in constant flux. Some companies did well, most did not. Those that did well such as Google understood the market, and were able to see the future.
In Nigeria, the financial services sector is seen as the key growth area, and there is the hype that even insurers must necessarily do well just as the banks. Investors will help themselves by looking at company specifics and ask themselves if the company they are interested in has any real competitive advantage over others in the same sector.
Gambling. People gamble largely for entertainment, not as a source of income. An investor can buy a stock, which he knows nothing about and make money, fine, but he should not gnash his teeth in distress if he loses money.
Stock experts stress that investors should not buy based on speculation or sentiment.
The rule, especially for value investing is “buy because you understand the company and recognize that it’s selling at a discount to its fair value.”
Here, an investor should always have a good grasp of a company’s fair value, its growth strategy, and the challenges it is likely to face going forward.
Value expert opinion. Many investors would ignore advice of an expert not to buy into a stock that is rising fast on the market, but the truth is that stock markets are subject to cyclical movements. Boom and bust cycles characterize the market and any investor caught in between could have his fingers burnt, especially if he takes a position as the stock price is peaking, just on the verge of a downward slide.
An investor should realize that by purchasing stocks, he has become part of the company, and has entrusted his investments to the managers who are expected to generate profit and give returns periodically in form of dividends, bonuses or capital appreciation.
So it is better to get in when a company is young, as the stock market does not defy nature, it needs to grow. Also, it is better to buy stocks on the decline, not when it is rising.
Investment analyst, David Meier, points out that investors have to be able to identify some characteristics of stocks and use available information to take advantage of investment opportunities.
One can draw from the concept of the stock market according to the father of value investing, Benjamin Graham, who postulated that “Over the short term, the market is a voting machine; over the long term, it’s a weighing machine.”
He pointed out that a simple way to access stocks is to assume that the Return on Invested Capital is the key variable that the market uses to weigh a company’s stock price for it to rise over the long term.
If this is so, he says that it could be assumed that stocks with falling prices and falling ROIC are in turnaround or stocks with rising prices and falling ROIC are in the danger zone.
Also stocks with rising prices and rising ROIC are probably in for good times while stocks with falling prices and rising ROIC are value opportunities.
However, these are mere assumptions. The key issue is always to get expert advice and avoid joining the bandwagon, which could result in short-term gains, but subsequently result in serious burns. – Punch
By Ayo Olesin, Punch
The wealth of the world’s richest men is usually tied to the value of the stocks they hold, so it was no particular surprise that the Mexican investor, Carlos Slim, displaced Microsoft’s Bill Gates as the world’s richest man a few days ago on account of a recent 27 per cent surge in the share price of Latin America’s largest mobile phone network, America Movil.
Slim holds a 33 per cent stake in the firm and he is now worth about $67.8bn compared with Gates’ $59.2bn.
Such tales of immense wealth built on investments in companies are largely fascinating and it is the big investors, like Slim and institutional fund managers that make the news usually because of the size of their investments and returns.
But there are millions of others that have built relatively modest riches on account of investments in stocks of both small and large companies, and the potential for small investors to make huge returns in companies that are not even heavily capitalized or liquid is always there.
The advantage a small investor has really is that he has all the time in the world to research and focus on companies that will deliver value and superior returns over time, compared with fund managers who are under pressure from clients to perform.
Unfortunately, this is not usually the case, as small investors tend to follow the bandwagon, placing their bets, based on sentiments, in shares rising in value rather than seek out undervalued companies.
However, for an investor to avoid being lumped in the group of underachievers and boost potential for high returns over time, there are a few common mistakes, which must be avoided.
The first is market timing. This simply means being able to predict how share prices will move within a short time frame so the investor can buy low and sell high.
If this were possible, all investors would be rich in no time. Experts point out that stocks behave in a random manner within a short time frame with prices swinging up and down for no apparent reason. Monitoring stock price movements on the Nigeria Stock Exchange for just a week will prove this.
Any investor that tries to time the market could actually make some quick gains, but also make equally quick losses since his actions are made at random and there is no underlying strategy.
It is always better to focus on investing in companies that are selling at a significant discount so that expectations of good returns are realized.
Another mistake small investors make is discountenancing the cost of making trades. Fund managers and stock brokers are in the business of making money through the fees they charge. The beauty of their business is that they make money whether you buy or sell shares. Fund expenses, trading commissions, account management fees, and the spread between bid and ask prices on stocks are money spinners for such institutions and if there is any profit left after trading on your account, the government still collects its cut in withholding tax on dividends.
So any discerning small investor should always be aware of fees or commissions that come with trades, which effectively translate into lower returns for the investor. It is advisable to hold onto stocks that are performing. What real gains could be made in selling off shares in Zenith Bank to buy UBA, for example, when both companies are in the same industry, with similar market capitalization and growth potential? However, some fund managers will not hesitate to do that since they will get their cut.
Looking beyond the hype helps an investor avoid serious losses. Investors in the infamous Dot.Com bubble can attest to this. Many people bought heavily into Internet firms that sprang up about a decade ago, in an industry where business models are in constant flux. Some companies did well, most did not. Those that did well such as Google understood the market, and were able to see the future.
In Nigeria, the financial services sector is seen as the key growth area, and there is the hype that even insurers must necessarily do well just as the banks. Investors will help themselves by looking at company specifics and ask themselves if the company they are interested in has any real competitive advantage over others in the same sector.
Gambling. People gamble largely for entertainment, not as a source of income. An investor can buy a stock, which he knows nothing about and make money, fine, but he should not gnash his teeth in distress if he loses money.
Stock experts stress that investors should not buy based on speculation or sentiment.
The rule, especially for value investing is “buy because you understand the company and recognize that it’s selling at a discount to its fair value.”
Here, an investor should always have a good grasp of a company’s fair value, its growth strategy, and the challenges it is likely to face going forward.
Value expert opinion. Many investors would ignore advice of an expert not to buy into a stock that is rising fast on the market, but the truth is that stock markets are subject to cyclical movements. Boom and bust cycles characterize the market and any investor caught in between could have his fingers burnt, especially if he takes a position as the stock price is peaking, just on the verge of a downward slide.
An investor should realize that by purchasing stocks, he has become part of the company, and has entrusted his investments to the managers who are expected to generate profit and give returns periodically in form of dividends, bonuses or capital appreciation.
So it is better to get in when a company is young, as the stock market does not defy nature, it needs to grow. Also, it is better to buy stocks on the decline, not when it is rising.
Investment analyst, David Meier, points out that investors have to be able to identify some characteristics of stocks and use available information to take advantage of investment opportunities.
One can draw from the concept of the stock market according to the father of value investing, Benjamin Graham, who postulated that “Over the short term, the market is a voting machine; over the long term, it’s a weighing machine.”
He pointed out that a simple way to access stocks is to assume that the Return on Invested Capital is the key variable that the market uses to weigh a company’s stock price for it to rise over the long term.
If this is so, he says that it could be assumed that stocks with falling prices and falling ROIC are in turnaround or stocks with rising prices and falling ROIC are in the danger zone.
Also stocks with rising prices and rising ROIC are probably in for good times while stocks with falling prices and rising ROIC are value opportunities.
However, these are mere assumptions. The key issue is always to get expert advice and avoid joining the bandwagon, which could result in short-term gains, but subsequently result in serious burns. – Punch
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