Naira Watch

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.

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:

best_perf1

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.

asi_2013

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.