Making Money from Shares – Part 1: Introduction

I decided to write this series in response to questions I received from friends. It will be a long series broken down into several parts to make it easier to read. The series will be devoted to how to invest in shares quoted on the Nigerian Stock Exchange.

Part 1: Introduction

What is Investing?

Investing is the purchase of a financial product such as shares and fixed income securities (Time Deposit, Treasury Bills, Commercial Paper etc.) or an item of value such as property with the expectation of gain in the future. In simple terms, investing is using money with the hope of making more money in the future. Investing whether in stocks, fixed income securities or property involves some element of risk as you may not get back all your money when the investment matures as with fixed income securities or when you decide to sell your shares or property.

People invest for all sorts of reasons, the main one being to save for retirement. Some invest to fund their children’s education and some for the freedom of having their money work for them. Whatever your reason, my advice is you start investing as soon as you have a full time job. This is because with compounding, time is your friend. In addition, when you start early, chances are you will start with a modest sum, which will allow you to learn and make mistakes when your account is still small rather than when millions are at stake.

It pays to keep in mind that investing in the stock market is a marathon with occasional burst of speed, therefore patience and endurance are keys to success.

Getting Started

Investing in shares of a company confers on you part ownership of the company proportionate to the number of shares you own compared to the total number of shares outstanding of the company. For example if you own 1 million shares of company XYZ and the company has 100 million shares outstanding, it means you own 1% of the company. You will also be entitled to receive any dividend declared by XYZ in proportion to the number of shares you hold.

You can invest in shares of companies that are privately held or in shares of companies that are publicly held and are quoted on a stock Exchange. This series is concerned with investing in shares of publicly quoted companies.

Stock Exchanges are where companies (through shares, bonds etc.) and governments (through bonds) can raise long-term capital and investors can buy and sell these securities. In Nigeria, the only Exchange for investing in shares is the Nigerian Stock Exchange (NSE), which commenced operations in 1961 as Lagos Stock Exchange.

Why invest in shares listed on the NSE? The main reasons that come to mind are:

• The market is not very deep with only about 120 actively traded stocks out of 190 listed at the end of 2012, which makes it easy for the beginner to research. Compare that with the US market, which has thousands of actively traded stocks. Among this 120 only about 40 are worthy of your money for one reason or the other which will become clearer as the series progresses.

• The market is young and inefficient, therefore higher potential for making money. For example, the average annual return in the last 20 years (ending December 2012) was 24%. Although in the last few years, foreign investors have become more active in the market and the average annual rate of return in the last decade has dropped to 15.6%.

• The Nigerian economy is growing with a young and growing population that portends well for future returns especially for long-term investors.

Financial Independence

You can achieve financial independence either by marrying money, inheriting money or making enough money. This article is concerned with the last point.

Yes it is possible to make enough money such that the income generated form your assets are enough to meet your expenses without having to work at all. Yes it can also be done early enough so that you can call it quits before hitting sixty. This can be achieved as early as your late 30s or early 40s. However, it will take planning, hard work, discipline and luck.

It is also absolutely ok to want to work till you hit 60 or drop or until your employer kicks you out. It is off course a lot easier to work until you drop if you own and run your business. As for me, I relish the freedom of knowing I am working because I want to not because I have to. I also relish the opportunity to do so many other things a full time job will not allow.

So how does one achieve financial independence? How do you acquire sufficient assets to that can generate enough income to cover your living expenses?

In my journey to financial independence, I have found the following very useful:

1. Learn to live below your monthly income as soon as you start earning. No matter how much you earn, if you don’t live below your income, you will end up in the poor house when you loose your job or retire. Therefore rule number 1 is live below your monthly income even if it is N10,000 ($60!). This discipline will serve you well when you start earning more. Keep aside 10-20% and increase as your income increase rather than increasing your expenses when you get a raise. Whether you have a monthly budget or not, the key is to keep aside the 10-20% every month.

2. From your monthly savings, put aside enough to cover 3 to 6 months living expenses so that you do not fall into financial abyss should you lose your job. Keep these funds in a savings account that you can access at any time.

3. Contribute to your employer’s retirement saving plan as required by law. However, if you are self employed or employed by a company with less than 5 employees, you will have to enroll voluntarily. Do so immediately as it forces you to save.

4. Start investing in the stock market once you have set up your emergency savings. You don’t need to have a lot to start investing. My first investment was in 1996 and it was 1,000 units of First Bank at N6 a share for a grand total of N6,000. These days, N50,000 is more than enough to get started.

We do not yet have Index funds in Nigeria and most mutual funds have been total disasters in the last decade. Therefore you have to invest in individual companies. Fortunately, it is not as daunting as it sounds as there are not more than 40 companies on the Nigeria Stock Exchange (NSE) worthy of your money.

Make sure you concentrate on buying good companies at fair valuations and select them from across several industries. that is diversify to manage risk.

Reinvest all dividends. Invest monthly, consistently through thick and thin.

Continue to educate yourself on the stock market and investing in general. Our market is still not as efficient as the markets in developed countries. This is good as it gives you the opportunity to exploit the inefficiencies for higher returns.

5. Take advantage of any opportunity to own your home. Whether it is through a loan by your employer, a cooperative or bank. For most people their single largest outgoing is house rent. It therefore makes sense to own your home outright to eliminate this large outgoing. And should you lose your job, the fact that you don’t have to worry about rent should be a relief.

If you take a mortgage, pay off as soon as possible as the high interest rate in our environment is too punitive and bad for long-term wealth accumulation.

6. Avoid taking debt to finance consumption. Ideally, your only debt should be your mortgage, which you should pay off fast.

7. Keep a record of all your assets and liabilities. It is useful to have a personal Balance Sheet at the end of each year. You can then review it against your plan. It not only tells where you are in your journey towards financial independence but also how well you are doing from year to year. I have my personal Balance Sheets dating back to 2004 and they are very revealing. More importantly without this record you wont be able to know whether you are making progress towards independence.

If you implement the above early in your career, you will be surprised how far you would have progressed over 15 to 20 years. This is because of the power of compounding. Starting early also ensures you have time to recover from mistakes. It also ensures you can be financially independent in your late 30s or early 40s even if you in a modest paying job.

To recap, the keys to financial independence are: live below your income, invest consistently, own your own home and avoid debt. I urge you to give it a go, there is nothing to lose except perhaps the shackles of the daily 9 to 5.

The Nigerian Stock Exchange – 2013 in Review

It was an excellent year on the Nigerian Stock Exchange (NSE) as the All Share Index (ASI) returned 47.2% for the year closing at 41,329. Most of the gains were in the first half of the year (42.5%) while the Index only gained 4.7% in the second half after a run off on the last 4 trading days.

The best performing sectors were Industrials (77%) led by the cement companies and Oil & Gas (40.5%) led by Fortis Oil and Conoil. The banking sector did not do as well but it returned 28%, an excellent return in any other year.

The best performing 10 companies were:


Most are stocks that were severely battered in the past (Forte, Wema and Transcorp) or penny stocks (Jos Brewery, Livestock Feeds and Evans Medical). Before you rush to buy these kind of companies, especially penny stocks, note that among the 30 worst performing only Guinness can be considered large all the rest are either small or in the lower end of medium sized.

Foreign portfolio investors accounted for about 51.4% of transactions on the exchange during the year compared to 61.4% in 2012. This is still a still a significant contribution compared to 2007 when foreign portfolio investors accounted for only 15% of transactions.

In all it was an excellent year (47%) coming off the back of a very good 2012 (35%). Despite these gains the Index is still 60% off the record level of 66,371 set in March 2008.

Banks and Insurance companies did not do as well in 2013 and as a result are undervalued relative to the Industrials and Consumer Goods companies. I expect the banks to perform better in 2014. The Consumer Goods companies and Industrials are in my view over valued and could be in for a correction in 2014. I have no confidence in the fundamentals of the Insurance companies, as the sector remains weak and fragmented with too many penny stocks.

My advice as always: stay in the market and invest for the long term in quality companies at fair valuations.


My Favourite Reads in 2013

This year I set a new record for the number of books I bought on Amazon. The figure is a whooping 216 Kindle books and another 18 paperbacks for a combined total of 234! I had to check again but that is the correct number. Out of these, I reckon I read about 140. My previous record established last year was 137 purchased and about 90 read. This means I actually need not buy any books in 2014 as I have more than enough to read!

Why so many books this year? The main reason is the Kindle. I realized in mid 2011 that I had ran out of space in my house for books, so I got myself a Kindle. I had been delaying purchasing the Kindle but the moment I got it, I was hooked. I can now literally order and receive a book within 2 minutes. The fact that I could now use my Naira MasterCard made it all the more easier.

So which were my favourite reads in 2013? There were many. Below is a selection of the 20 of the best in no particular order.

1. Mastery – Robert Greene
2. Blood & Beauty – Sarah Dunant
3. The Signature of All Things – Elizabeth Gilbert
4. What’s it all About – Julia Baggini
5. The Investment Checklist – Michael Shearn
6. Barca: The Making of the Greatest Team in the World – Graham Hunter
7. The Accidental Public Servant – Nasir El Rufai
8. The Great Investors – Glen Arnold
9. Finding Flow – Milhaly Csikzentmihalyi
10. High Financier – Niall Ferguson
11. Essays of E. B. White – E.B. white
12. It is When You Sell That Counts – Donald Cassidy
13. The Five Rules for Successful Investing – Pat Dorsey
14. Traders at Work – Tim Bourquin and Nicholas Mango
15. Lean In – Sheryl Sandberg
16. The Everything Store – Brad Stone
17. Eyewitness to Power – David Gergen
18. Wolf Hall – Hillary Mantel
19. One for the Books – Joe Queenan
20. The Discovery of France – Graham Robb

Why do you Read?

It is not often that one gets paid to reminiscence about why one reads and what one reads. Joe Queenan got that privilege and I for one enjoyed his musings in his book “One for the Books”.

You will love this gem of a book if you like reading fiction. Although fiction is not my forte, I decided recently to give it a go. Queenan’s book came in very handy with hundreds of suggestions on the best fiction out there. From classics to modern, from crime to drama and from the large volumes to the slim volumes, they are all in there.

Queenan believes we mostly read to escape our reality. Although that maybe true, I for one read fiction mainly to enjoy the language that is how the story is written rather than the story. I absolutely enjoy how some writers string together just the right words resulting in beautiful, engaging and memorable prose.

I am therefore a sucker for the well-written book not just fiction but non-fiction. In fact in the last decade I have mostly read non-fiction, averaging a book a week. I only started reading fiction again a few months ago and Queenan’s book came in very handy.

So why do you read and what do you read?

If you are into finance and finance history and enjoy a well-written book, then any book by Michael Lewis, Roger Lowenstein and Niall Ferguson is a good place to start. If you enjoy fiction, you will find the recommendations in Queenan’s book more than enough for the next few years.

Simple But Not Easy

It is often said that investing in the stock market is simple but not easy. What one needs to do to enjoy investing success is simple: buy good companies at fair valuations and hold for the long term. However, executing this strategy is not easy. Why?

The reasons are mainly to do with human nature and some are discussed below.

Desire for Quick Gratification

To succeed at investing the simple way, we need a long-term view. Unfortunately most of us prefer quick gratification. Waiting 5 to 10 years to enjoy the fruits of our labor is just not in our nature. It therefore requires tons of discipline and patience to invest consistently the simple way. These are also in short supply.

Low Pain Threshold

Another reason is that we have a low pain threshold and hate pain more than we love pleasure. Therefore, in volatile market conditions, which are common these days, we tend to loose our nerves at the worst possible time; after a sharp decline.

Furthermore, even when markets stabilize, our fear of pain paralysis us from taking advantage of low valuations. We tend to rush back in when the upward swing is more than half way done. Which leaves us with a double whammy, losses on the way down and no gains on the way up.

Desire for the Latest Fad

Finally our desire for the latest investment fads and exiting stories makes it difficult for us to select a good, stable, dividend paying but dull company. We would rather chase the latest fad, the next apple or penny stock dreaming of stupendous gains.

What to do

So what can we do to escape this difficulty and execute a simple investing strategy with ease?

First we need to accept that investing is a marathon and not a sprint. Next we need a plan. Write down why you are investing, what do you intend to achieve and how long you need to keep at it.

With this is mind, take your time to choose quality companies at fair valuations. If you miss the current bus, another one will surely arrive. Therefore, be patient, do not chase up over valued companies.

Invest consistently, preferably monthly. If possible, set up an automatic monthly transfer to your brokerage account.

Review your investments no more than once a quarter, when quarterly results are released. This will ensure you miss noticing most of the volatility. Sell only when it is clear company fundamentals have deteriorated and management has no clear idea and plan on how to get out of the rot or when you have reached your goals. Outside of these, stay invested even if the world seems to be coming to an end; if the world is truly ending, your investments should be the least of your worries.

Have a long-term view, invest consistently in good companies at fair valuations, stay put through the volatility except if fundamentals are in permanent decline or you have reached your goals. Simple and easy!

Buy & Hold Still Works

You often hear that buy and hold no longer works but from my experience the good news is that it still works. Yes the markets are more volatile and yes speculators still make money but buy and hold still delivers strong returns to the diligent and patient investor.

There are off course differences between buy and hold and buy and forget. For buy and hold to work, you must buy good companies that grow at a reasonable pace and are priced fairly. Thereafter, you must review each company at least once a year to ensure it is still fundamentally strong despite any hiccups you might have observed. I review my holdings every quarter once the quarterly results are released. Any company that shows sign of weakness is put on a watch list where I keep an eye on it. I sell once I believe the company has lost its way permanently. Therefore, you cannot afford to forget your investments.

To illustrate why buy and hold still works, let’s examine Nestle Nigeria. I first bought it in 1998 at about N18. Today it sells at N1,051 despite several splits and pays a dividend of N20 per share. The dividend I receive today after the splits is about N60 per each original share, which is thrice the cost of the original share. Even if you discount it at the growth rate of the economy, the dividend is about N16 delivering a stunning yield of 89% and this just for a 15 year holding period.

It is not just Nestle but others like GTB and FBN, well known banks, have also delivered excellent results in the last 15 years despite the recent collapse of the stock market.

There are also companies that have been laggards or outright investment disasters. An example, which I bought in 1996, was Ekocorp, a health care management company. It never took off and although I did not loose money it was a poor investment and illiquid. Fortunately, I was able to sell in 2007 when the market as a whole took off.

My strategy in a nutshell is thus:

1. Research and find strong companies selling at reasonable valuations. The price needs not be a bargain as such are rare but it must be fair.
2. Buy these companies
3. Review quarterly to decide whether to hold, watch or sell.
4. Continue to buy more of the company as long as the fundamentals are strong.
5. Hold no more than 12 companies at a time to enable me keep my review manageable.

While there is money to be made in speculating, I prefer the above approach as it requires less time, involves fewer decisions, is less stressful and has delivered returns I can live with comfortably. That is all that matters.

Down Football Memory Lane

I have watched many football games and some have been pure joy and etched in my memory forever. Despite the passage of time, the images are still vivid as if the games were played yesterday.

The 1982 world cup was the first world cup I watched live on TV and the game between Brazil and Italy was a game for the ages. Italy needed a win to progress while a draw will be enough for Brazil. It was a talented Brazilian team with Zico, Falcao and the late Socrates. But the Brazilians did not reckon with the supreme poacher Paolo Rossi. In fact most of the world didn’t as he was just back from a two-year ban and had not scored a goal thus far. Rossi went on to grab a hat trick in a thrilling 3 – 2 Italian win.

It was in 1982 I fell in love with the Italian game; patient, pragmatic and decisive when it matters. After dispatching Brazil, Italy beat Poland 2 – 0 enroute to the final where Germany was waiting. Cabrini missed a first half penalty, the first miss in a final game. It was inevitably Rossi that fired the Italians in front in the 57th minute. Tardelli made it 2 – 0 and celebrated in a memorable fashion; he ran across the field with pure joy and disbelief on his face that one can still remember it. Altobelli made it safe at 3 – 0 before the Germans grabbed a consolation in the 83rd minute through Breitner.

Another game I vividly remember was the Champions League final between Milan and Barcelona. The Catalans were favorites but crashed spectacularly to Milan who were without Van Basten and Baresi. The game was over in less than an hour as Milan cruised to a 4 – 0 lead with 2 goals from Massaro, and one each from Savicevic and Desailly. Despite winning the champions league again in 2003 and 2007, Milan have since lost their allure while Barcelona had to wait until 2006 to win the champions league again.

A more recent and balanced game was the world cup final between Spain and Holland. Played in Johannesburg, it was the first world cup on African soil and we were guaranteed a first time winner as neither two have won the cup in the past. The Dutch were in their third final while the Spaniards were in their first. The Dutch adopted a robust style hoping to disrupt the slickly Spaniards and almost succeeded. The only goal of the game came in extra time in the 116th minute. A pass from Fabregas found Iniesta in space in the box who then blasted in the most important goal of his career. The Spaniards were world champions for the first time.

The next world cup is in Brazil and we are guaranteed a spectacle. The Brazilians are favorites on home soil though Spain, Argentina, Germany and Holland will have something to say.

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