Dr. Ajibola Awolowo
In 1992, a young man who worked a minimum wage job as a garbage collector in United Kingdom won £10 million pounds in the lottery. He splurged on parties, jewelleries and other frivolities. Just 8 years later, he was back to doing the minimum wage job of a garbage collector. Tales like this are rife. We can almost conclude on their behalf that – Easy come, easy go.
In 2016, a Nollywood movie titled “Three Wise men” depicted 3 retirees who got their gratuity and went on a spending spree only to come to their senses later. It was hilarious but I wish things like that only happened in movies. Many retirees end up losing huge sums of money in a bid to venture into an income generating business or investment. Unfortunately, the said sums did not come easily. It took many years of meritorious service to gather it.
These examples show that it is not the amount of work done to earn money that determines how wisely or not one uses it. Wise actions stem from knowledge, which when internalised and well understood, guides one into making good choices. This is, unfortunately, disregarded by many.
Before going any further, I would like to apologise for a few things. The first is the seeming religious undertone of the topic as some passages in the holy books infer the same thing. This is, however, not a religious write-up. Rather, it is a discussion about common worldly wisdom.
The second thing I apologise for is the erroneous impression that the topic may pass. This impression is that anyone who loses money is not wise. Nothing could be farther from the truth than this. Even the best investors in the world lose money in about a third of their deals. Despite all the risk management strategies put in place by banks, who should unarguably be the experts in all money issues, they still lose money in bad loans.
There are a few ways to approach subject we are discussing today. The first is that unwise people literally have no money to lose in the first place. They may work hard and earn an income, but they end up spending all they earn. They have no savings and are often burdened by a ton of debt. They try to solve this by working harder or doing extra hours. Unfortunately, Parkinson’s Law catches up with them.
Parkinson’s Law postulates that our expenses will always rise to match our income unless conscious effort is taken to avoid this. This group of unwise people are parted from their money even before they earn it. Wisdom demands that we fight Parkinson’s Law by setting a portion of what we earn aside for the rainy day. In the book, “The richest man in Babylon”, the author states, “A portion of all you earn is yours to keep”.
Albert Einstein said “Compound interest is the 8th wonder of the world. He who understands it earns it while he who doesn’t pays it”. Unfortunately, this group of unwise people pay compound interest rather than earn it. They pay it by carrying debt and by forgoing the chance to earn an income on savings which they do not have.
Someone reading this may be thinking, “I save a portion of my income. I even go a step further by investing my saving in the stock market to earn an income. I am sure this excludes me from the group of people who are unwise”. I hate to announce to you that simply ‘investing’ your savings in stocks does not make you immune from low levels of wisdom. The way you invest matters.
Many times, ‘investors’ go through a more rigorous process in buying a new phone than they do before buying stocks. It goes something like this. You see your friend using a new phone or you just watched an advert for the latest phone in town. With the permission of your friend, you look at the picture quality of his phone, the memory size, the processor speed, the applications that can be loaded onto the phone and the operating system the phone runs.
Next, you go online and read reviews about the phone from people who use the phone. You also go the extra length by comparing the features of the phone to phones from other manufacturers that sell within a similar price range. It is only when you have gone through all this rigorous process that you go to the phone dealer to buy the phone. While buying it, you even ensure that the phone is covered by a warranty so you can easily return it if the phone begins to malfunction.
The purchase of the phone started by acquiring knowledge about its capacity and capabilities. Knowledge about this phone was then compared to knowledge about other phones – Understanding. Lastly, we wisely act on this understanding by buying the phone which is best suited for our needs at an appropriate price.
What process do many of us follow before buying stocks? Often time we just get a recommendation from an ‘expert’ on an online stock trading forum or from a brokerage house. We do no due diligence before pouring our savings into it. We feel smart when the price goes up afterwards and aggrieved when it declines. When we lose money this way, we take no responsibility for the loss. Rather, we put the blame on the ‘experts’ for misleading us.
Another innovative way investors get parted from their money is by their chase of the latest fad in the market. We seek to buy companies that are trending up in price. Many times, this ends up being a self-fulfilling prophecy. The chase of average or below average companies by good money leads to an upward movement in the price. This reinforces our conviction, and we deploy more cash into these companies. Eventually, the music stops, and you are left holding the bag. You will have nobody else to blame but yourself.
You might think, well, I have made good money countless number of times using these strategies in the past. My response to this will be that, getting a good outcome from a bad process does not make the process right. The end does not justify the means.
The stock market is very unforgiving. You can win 10 times in a row but lose all your gains, or your capital, at the 11th time of asking. The solution to this is to act wisely all the time. This does not guaranty that you will be right all the time. Rather, it will help you to be right most of the time, maximize your gains and minimise your losses.
Investing wisdom dictates that you have a very well-defined process for stock picking which should be time tested, proven and replicable. This process should be driven by data and not by sentiments, word of mouth or gut feelings only.
Before investing one kobo in stocks, I advocate that every investor first understands themselves. Think about what training you have received via education – formal or informal. Consider which job you presently do and what hobbies you have. Knowing all these will help you identify which industries you might already be knowledgeable about even without doing any further research. This is called your circle of competence.
For example, a teacher might have quite a lot of insight into the printing/ publishing industry as you know the textbooks recommended for the students, the companies that publishes them and the publisher with the most relevant books in their portfolio. An electrical engineer will know about electric cables and the companies that produce the best wires. A pharmacist will know which medications doctors prescribe most and which pharmaceutical company makes them.
This knowledge, which is easily overlooked, is the foundation on which further information can be built on. With this knowledge, you are in a better position to understand companies in those industries and identify new trends in those industries even before regular investors do.
Investing in the stock market can be quite competitive as investor jostle to identify the next big company before others do. With this information, one can buy the company early while its price is still cheap. Therefore, every form of advantage you, as an individual investor, can legally gain over the average investor matters. Don’t ignore or discount what you already know.
Wise and informed actions in the stock market stems from the first step of having a thorough understanding of oneself. How well do you know yourself?