Tuesday 11th of July, 2023
For most people, the date above was just like any other day. Except it was your birthday or you had a memorable event on that day, it was just a regular day. However, on the Nigeria Stock Exchange, that was a monumental day. It was the day that the Nigeria Exchange Group All Share Index set a new all-time high of 65,669.29. Believe me, this was no mean feat.
The previous record of 65,652.38 was set in February 2008. This was at the height of the go-go years of the Nigeria Stock Market. Everyone was talking about investing then. You could easily get investing advice from a taxi driver, barber or petrol station attendant.
In the same vein, we have seen meteoric rise in the Nigerian Stock Market in the last few weeks. At the end of trading on 11th July, the NGX All Share Index was up by about 26% in 2023 alone. The market was agog with excitement. Reams of chat pages on various stock market social media forums reflected how giddy everyone was. I know the feeling, I have been there before and this isn’t my first rodeo.
I was one of those gullible ones attracted to the stock market in 2007/ 2008. I did the work (or I thought I did), saved one naira here and one kobo there and put my hard-earned money into various company Initial Public Offers and on the floor of the exchange. I was a 300 Level medical student then. All my friends were talking about the stock market. I was daydreaming about how I’ll buy a car with the proceeds and even set up a small office for my stockbroker in the little town where I lived.
I laugh now on realising how big a hold the emotion of GREED had on me. Mr. Market had me in his corner with all my defences down and he was preparing the killer punch without me even realising. His punch connected right with my jaw. My mouth was bloody and I was reeling from the shock. Disaster had stuck. Everything I bought turned to dust. The all-share index literally imploded and as a result, I took a 12 year sabbatical leave from investing.
Fast forward to 2023, the market broke the previous all-time high and has subsequently declined by about 4.72% since. I can literally smell the FEAR on the street now. While some are worried about their paper profits disappearing, others are worried about their growing losses having bought some companies at the peak of the market.
The emotions of greed and fear are very powerful forces in investing that influence our behaviours. When the market is going up, we get greedy and try to make more money by buying the hottest company on the block. We do not want to miss out on the gains. And when the market declines, we all want to get out to preserve our paper profits or limit a loss. This is the exact behaviour that makes people end up buying high and selling low which is the exact opposite of what they should be doing to invest profitably.
No one is immune from the impact of these emotions. If you invest and your money is on the line, you will feel those emotions. There are a few differences however in how we feel those emotions and how we respond to them. Some people, just naturally, have the temperament, predisposition or are just gifted to be able to suppress those emotions and remain rational/ straight-thinking despite the swings of the market. If you are in this group, lucky you.
Others, like myself, have had to learn the hard way. Bearing scars of previous lessons learnt from greed and fear, we now consciously acknowledge them and put systems in place that forces us to continue acting in a rational way. This article aims to pass down some of those systems I have implemented and, hopefully, help you avoid the scars that I brandish.
First, you must get your personal finances into good shape. This starts from having a regular and steady income that is separate from your investing. You need the assurance that you can put food on your table and provide for your loved ones irrespective of what the stock market does. If you are depending on the income from your investing to make ends meet, you will be under pressure to make a profit which will empower those emotions of fear and greed and increase the likelihood that you will succumb to them.
Another thing you must put in place in your personal finance, as an insurance against losing your primary source of income, is having an Emergency Fund. This entails that you have about 3 – 6 months of your monthly expenses saved up in liquid assets separate from your investing capital and inaccessible to your day-to-day spending.
Having sorted out your personal finances, you must now decide on a broad strategy to invest by. There are various schools of thought about this – value investing, growth investing, momentum investing, scalping, day trading, using technical analysis, quant investing etc. Each method has its peculiarities, advantages and disadvantages. No method is better than the other generally but one method may be more suited to your individual circumstance/ personality than the others. You have only one job – find which one works best for you.
The most important thing about this step is not the method you choose but sticking to whichever method you have chosen. The method you choose will not work 100% of the time but if it suits your person and you stick with it, you will do well over time. The problems arises when you let greed and Fear push you from what you know to trying something you do not know. You straightaway put yourself at a disadvantage and into the guessing game. This is a recipe for disaster.
If you do not have the temperament or your primary source of income (Job/ Business) does not afford you the time to rigorously invest/ monitor your investments, you will be susceptible to fear and greed. You can mitigate against this by investing through investment professionals or buying an Index fund or an Exchange Traded Fund (ETF).
You can also implement the strategy of dollar cost averaging where, at defined time intervals, you invest specific amounts of money into preselected assets/ companies/ indexes or ETFs irrespective of their prices. This automates your investing and takes away you trying to time the market.
Lastly, we need to be kind and gentle with ourselves. We are human and have blood flowing through our veins. We literally do not have nerves of steel, so it is normal to make mistakes sometimes. Accept that you will make a few bad decisions out of fear and greed. More importantly, do not dismiss those mistakes when you make them. Rather, analyse them and learn from them. What made you succumb to those emotions? What can you do to make sure you are stronger and less susceptible?
Greed and fear are emotions man developed millions of years ago (in the stone age). They helped us survive when food was in abundance and escape all the dangers that lurked around every corner. They are still very useful in today’s world, however, the landscape has changed. We now need to learn, not just how to adapt those emotions to our world but how to act rationally in the face of those feelings.
NB: In episode 49 of my podcast, I had a conversation with a friend and brother, Mr Oluyomi Faneye on the Topic – Managing the emotions of greed and fear in investing. I had to listen to it again recently just to remind myself not to get greedy or fearful. I suggest you do the same too. https://podcasters.spotify.com/pod/show/value-nigeria/episodes/49–Managing-the-emotions-of-fear-and-greed-in-investing-A-chat-with-Mr-Oluyomi-Faneye–Team-Lead–Wealth-Creation–Kedari-Capital-Nigeria-e1eac8u
Dr Ajibola Awolowo
Host, Value Nigeria Podcast
Valuenigeriawithajibola@yahoo.com