Dr. Ajibola Awolowo
There are a few events in history that were significant enough to change the world or how we see the world. How we recognise time was forever changed by the birth and death of Christ. There is an era “BC” – Before Christ and “AD” – After Death. Another event that changed the world, in its own way, was the advent of the internet. It changed how we do everything. We communicate in new ways today than was ever imagined possible 100 years ago. It changed entertainment, education and socialization.
Before the internet, your social circle was limited to people you were related to by blood and people you have physical interaction with. This meant there was only a small number of people you could directly influence and learn good or bad things from and vice versa.
Today, you can have conversations with people sitting halfway across the globe within a split second. You can learn from them without ever having met them. Our social circle now has no limits except our imagination. You can influence and be influenced by people you have never met and will most likely never meet.
The field of investing has also been changed permanently by the internet. Interaction with one’s brokers is now seamless. Gone are the days of having to fill paper mandates before a trade could be executed. Investing has also become very social. There are countless investing boards or platforms where investors can share ideas. You can see the orders placed by respected investors and copy those trades.
Now that communication is almost at the speed of thought and with are no boundaries with whom we can communicate with, we can either be influenced positively or negatively by the crowd on social investing. Fear of missing out (FOMO) has been strengthened by social investing just as much as good investing habits have. We need to be careful with how we allow ourselves to be influenced on social investing platforms.
I belong to a few social investing groups and it is very common to see people post, “I just made 140% profit in Oando” or “I just sold my Dangote sugar at N60 from my entry price of N21”. Posts like these are encouraging to some investors who aspire to invest profitably but it can make other investors red in the face with envy while berating themselves for missing those opportunities.
We put undue pressure on ourselves when we try to keep up with the Jones on social investing platforms. We begin to chase returns, take bigger risks than we realise with our capital, try to time the market and prove to others that we are gurus. This cocktail of unhealthy competition and excessive trading will lead to only one outcome – Huge losses.
The reason why Social Investing can easily lead to disastrous outcomes is that the person you are copying or envying is in totally different circumstances than you are. The source of capital they are deploying may be totally different from yours. When you beat yourself up for missing those juicy returns they have cited (that’s if those returns are even real), you increase your own risk of doing silly things/ making mistakes in a bid to close the gap.
Warren Buffett mentioned that when the capital he managed was relatively small, he was able to make returns in excess of 50% per year. Now that his portfolio has grown so large that his company has more cash than the foreign currency reserves of most African countries, he would be foolish to try to chase the same returns.
Nothing illustrates this point better an experience I had in childhood where we nearly burnt down the house of family friend. I was only about 7 or 8 years then. We were there on holiday and they had a beautiful vase containing dried floral arrangement similar to the one in the picture. Being naughty children, we would break off one tiny piece of the dried flower and light a matchstick to it. It would burn instantaneously but it looked unchanged to our naïve eyes. Then, we got the bright idea to light a match to the whole bunch in the vase.
To our silly minds, we thought we would have the same thrill that we had obtained from burning little pieces of the flower. It had been a safe, small flame and was over in a second or two. What could go wrong if we set the whole bunch ablaze? We quickly learnt that a whole lot can. There is a big difference between doing something on a small scale and doing it in grand style.
We set fire to the flowers but the part I will always remember is, we the kids, all running out of the house screaming “fire, fire, fire” when we saw the blazing inferno we had triggered. Thankfully, neighbours were able to help us put out the inferno before we burnt down the house. I was about the youngest, so I got away with it. I don’t think my older ones fared as well as I did though. They probably got a good spanking following our experiment.
When your capital is relatively small, there are some risky bets you can place knowing that you can easily get in and out of the company without affecting the price. Try doing the same gymnastics with a large amount of capital and you’ll be surprised at how your trades will influence price and put you at a disadvantage.
The investing time horizon under which you and other investors on social media operate under can also be quite different. They may be investing funds they wouldn’t need in 5 – 10 years while you are investing money you’ll need to pay your child’s school fees in 3 months. It will be a colossal error to assume you can both place the same trades and chase the same returns target.
The source of the funds deployed in investing and the availability of emergency funds also influences how one invests. The risk taken and style of investing employed by someone who saves N500,000 every month from their salary will be very different from that of another person who can only save N500,000 from their salary per annum. The first person can afford to do some jump in, jump out (JIJO) trades knowing that if it goes south, they will have more capital next month whereas the second person needs to be much more careful to guard against loss of their capital.
On social investing, people do not go into detail about the magnitude of capital they are deploying, how long they can afford to remain invested or whether they have a back up plan or not. All they share are the trades they make and the profits they made in the process. Hopefully, now you can see why it is foolish to compare yourself to anyone or try to match the trades/ returns of someone whose circumstances you know nothing about.
The solution to this is to understand yourself. Know what kind of investor you are, where your capital has come from and how much risk you can bear. Having honest answers to all these will help you define the games you can play and those you must not even go near the arena.
I am not saying social investing is bad. In fact, it is a great way to get new ideas, test your thesis about a company and learn the downsides of every investing idea you have. The wisdom of the crowd, even on social media, can be used to improve your investing. Do not, however, be carried away by all the noise, buzz and hype generated as this will put you at risk of a catastrophe.
In conclusion, a popular Yoruba adage says only a foolish elubo (yam powder) seller will proceed to hawk their goods in the rain just because they see a fresh vegetable seller doing the same. Take advantage of the huge resource social investing affords but don’t lose your head in the process.
Dr. Ajibola Awolowo is the founder of Value Nigeria Podcast. He can be reached via firstname.lastname@example.org