Jonbull’s Stock Guide: How to Invest Profitably in a Volatile Stock Market

By J.P. Obienugh

With the global financial markets in turmoil, the new age investor on a quest for profit needs a simplified guide for charting through a stock market beset with volatility. Jonbull’s Stock Guide is timely and vividly written for those astute investors willing to take advantage of beaten down value stocks at great bargains for long term profit.

It contains investment strategies that were inspired by the world's finest investors, tips, fundamental guidelines, frequently asked questions and a rich glossary of investment terms that will aid and keep you well ahead of the market. For those of you who have been actively participating in the stock market, investing and reaping all of its full benefits or taking losses here and there, you might think that you have heard, seen, and done it all. Nevertheless, is that really the case?

As an active player in the stock market, the author often discovers new ways of investing in the market. Superb ideas that make him think about profiting from timeless investment strategies that are way outside the prevailing and sometimes, speculative norms. Jonbull’s Stock Guide outlines everything that an average investor needs to stay well ahead of the stock market in troubled times.

• Language: English
• Publisher: Trafford Publishing
• Release date: Sep 7, 2010
• ISBN: 9781426986246

J.P. Obienugh

J.P. Obienugh holds a B.Sc. Hons in Economics. As an equity investor, he manages his portfolio with Fidelity. He made his first million at the age of twenty five and has been applying Warren Buffet’s principles of buying into good businesses ever since.

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Copyright 2010 JP Obienugh

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or

transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or

otherwise, without the written prior permission of the author.

The information, ideas, and suggestions in this book are not intended to render professional advice. Before following any suggestions contained in this book, you should consult your personal accountant or other financial advisor. Neither the author nor the publisher shall be liable or responsible for any loss or damage allegedly arising as a consequence of your use or application of any information or suggestions in this book.

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To my late mother, Catherine Chinyelu Obienugh

".. The race is not to the swift or the battle to the strong, nor does food

come to the wise or wealth to the brilliant or favour to the learned; but

time and chance happen to them all"

Ecclesiastes 9:11 (NIV)

PREFACE

You are required to read this guidebook as if the author was writing to you, his protégé. Feel free to accentuate any sentence that strikes you the most and underline words or phrases related to your peculiar circumstance as a beginner investor. Do not forget to memorise the selected quotations because they are wise sayings of those that have been in the stock market since the abolishment of the barter system of trade and they are still relevant up till this present time.

As you read, keep in mind that the author’s personal encounters as an active investor in the stock market inspired this guidebook. Its instructions and guidelines are apt and timeless and were carefully researched and compiled in order to inspire and motivate you to take calculated actions devoid of the usual investment mistakes of amateurs.

This guidebook more than tells you how to invest profitably in a volatile stock market–which is any stock market operating in any sovereign geographic corner of our global village–it also serves as an invaluable reference material for all categories of investors who are exposed to the same risk factors worldwide. When confronted with reoccurring market dynamics which will always come and go, do not hesitate to refer to it from time to time. You will be surprised that the stock market really does repeat itself! Focus on the teachings that are most applicable to you and question or adapt them for your own profit!

Do not shoot through this guidebook in a matter of days but study it diligently as you would a sacred scroll and apply its teachings to your investment portfolio with the guidance of a certified and trusted investment professional. No matter what your investment goal is in the stock market, something in this book will surely be of service you. Guard it jealously.

To end with, those who were late to the last stock market boom–who still do not believe that real money moves and can easily be made out of thin air, well… the after party is yet to come, holding in the stock market near you.

JP OBIENUGH

ACKNOWLEDGEMENTS

I would like to first of all, thank the Almighty God for his abundant grace and mercies in my life and then the following people:

Jules Merem, thank you for prompting this book. Nancy, I would not have completed the manuscript without your encouraging offline messages all the way from the Netherlands to Ohio. My kind gratitude also goes out to Oge Kalunta (MD) for providing me with a second opinion and Tochukwu Obidozie (Teekay) for always believing–without an iota of doubt, in my innate abilities.

My warm appreciation goes further to my father, Chief C.C Obienugh JP–The Oyiri Gedegwum of Oduge and the Okputolokpu of Nnewi and I cannot end this without acknowledging my furry buddy and man’s best friend–Toby, for keeping me company night after night, as I punched away on my Toshiba L300 laptop.

Special appreciation to my publishing consultant Cathy Babcock, my PSA Ashley Gooch and Greg Salazar, my marketing consultant Derek Flook and the rest of the Juniper Design Team for their flattering one-on-one author support. They truly made it possible for you to have this invaluable book in your very hands in good time.

John Paul Obienugh

CONTENTS

MODULE I     GETTING STARTED

Chapter 1     Introduction

Investment Planning

A Beginner’s Rules of Market Engagement

My Humble Beginning

Keys to Successful Investment Planning

Knowing Your Personal Finance

Benefits of Budgeting

Creating a Personal Budget

Strategising your Personal Budget

Investment Planning Checklist

Chapter 2     Saving vs. Investing

Should You Invest or Save?

Questions You Should First Ask Your Broker

Chapter 3     The Stock Market

What Drives the Stock Market?

Why do Companies List on the Exchange?

What is a Prospectus?

Other Methods of listing on the Stock Exchange

Different Types of Shares

Chapter 4     How the Stock Market Works

Understanding Stock Market Scenarios

Psychology of Investing

Stock Market Theories

Ben Graham’s Mr. Market

The Investor or the Speculator

You are probably an investor if:

You are probably a speculator if:

Par Value Investing

Value Investing

Growth Investing

Income Investing

Chapter 5     Stock Market Bubble

How to Recognise a Market Bubble

Stock Market Crash

The Nigerian Experience

How to Identify a Recession

Chapter 6     The Stock Market Index

Weighting the Indices

Market Indices of the World

AEX

All Ordinaries Index

BSE

CAC 40

CASE 30

DAX

DJIA

FTSE 100

HSI

JSE

KOSPI

KSE 100 Index

Kuala Lumpur Composite Index

NASDAQ Composite

Nikkei 225

NSE ASI

NYSE Composite Index

OMX Iceland 15

Russell 2000® Index

SMI

S&P/ASX 200

S&P 500

Reasons for Market Indices

Can a Market Index Drop to Zero?

Chapter 7     Why Invest in Stocks?

Market Gains for Staying Invested in Stocks

Remember the Seven Easy Steps

Chapter 8     Risk in Investing

Risk Tolerance

Overcoming Your Fears of Investing in Shares

Chapter 9     Market Myths

A Smart Investor’s Profile

Warren Buffett’s Investing Style

Frequent Mistakes of Amateur Investors

Chapter 10   Market Perception & Investor Confidence

Stock Moving Events (SMEs)

MODULE II   VALUATION METRICS

Chapter 1     Stock Research

Stock Valuation Methods

What is the Price of the Entire Company?

What is the Earning Potential of the Company?

Earnings Growth

Earnings Yield

Consider the Company’s Price to Earnings Ratio

The PEG to the Rescue

Book Value

Know the Company’s Dividend Yield

Dividend Cover

Price to Sales Ratio

Return on Equity

Return on Assets

Current Ratio

Quick Assets Ratio

Debt to Equity Ratio

Profit Margins

EBITDA

Interest Coverage

Enterprise Value

Measuring Bank Performance

Limitations of Financial Ratios

Stock Value Analysis

Chapter 2     The Z-score formula

MODULE III     PORTFOLIO MANAGEMENT

Chapter 1     Modern Portfolio Theory

Asset Allocation Concepts

Asset Class Investing

Rebalancing

When Should You Rebalance?

Chapter 2     Risk in Diversification

MODULE IV      BOND INVESTING AND SECURITISED PRODUCTS

Chapter 1     Bonds

Government Bonds

Municipal Bonds

Corporate Bonds

Convertible Bonds

Major Bond Features

Bond Price Volatility

The Risk in Bond Investing

Bond Trading

Chapter 2     Asset Backed Securities

Collateralized Debt Obligations

Types of CDOs

MODULE V     BASIC STOCK INVESTMENT STRATEGIES

Chapter 1     The Buy and Hold Strategy

The Market Neutral Strategy

The Cost Averaging Strategy

Constant Investment Strategy

The Constant Ratio Plan

Dividend Income Strategy

Dividend Reinvestment Plans

The Contrarian Strategy

Chapter 2     Leveraged Trading Strategy

Shorting the U.S. Stock Market

Day Trading

Basic Day Trading Strategies

MODULE VI      BASIC BOND INVESTMENT STRATEGIES

Chapter 1     The Buy and Hold Strategy

Total Returns Strategy

The Ladder Strategy

Bullet Strategy

Barbell Strategy

Tax Advantaged Strategy

Zero coupon Strategy

Bond Swap

MODULE VII      FUNDAMENTAL VS TECHNICAL STRATEGY

Chapter 1     Market Strategy Debate

Types of Trends

Moving Averages

Relative Strength Index

Volume

Support and Resistance

Fibonacci Retracement

Accumulation and Distribution

The Combination Strategy

Chapter 2     Reasons to Sell a Stock

Conclusion

Frequently Asked Questions

Glossary of Investment Terms

Selected Bibliograhy

Online Resources

MODULE I

GETTING STARTED

CHAPTER 1

Introduction

Y ou probably have not owned a single stock all your life but may have heard about the stock market long before picking up this guide. The stock market is in the news every day. You hear about it anytime it reaches a new high or whenever it makes an all-time low. For example, take the following news summary: The market index rose by some basis points today, with advances leading a three weeks decline by a margin of… Mm hmm, the stock market is exhilarating and if you are just starting out as an investor, there is a completely new world and exciting experience waiting for you out there!

For those of you who have been actively participating in the stock market, investing and reaping all its full benefits or taking losses here and there, you might think that you have heard, seen and done it all. Nevertheless, is that really the case? As an active player in the stock market, I often discover new ways of investing in the market. Superb ideas that make me think about profiting from timeless investment strategies that are way outside the prevailing and some times, speculative norms. Jonbull’s Stock Guide is the culmination of these ideas which originated from my own experiences during the course of investing.

Investing is a term with several closely related meanings. The term originates from the Latin word vestis which means garment and it refers to the act of putting things (money) into others’ pockets. According to financial experts, investment is the commitment of present funds in order to derive future income or for the appreciation in the value of the invested principal. Economists consider a real investment as physical assets such as a house or machineries while accountants focus on financial assets such as cash that is put in a bank or the stock market which may then be used to buy a real asset.

The foregoing scholarly fields are right in their definitions and each will play a role in depicting what investing in stocks really means.

This guide is vividly written for the beginner investor. Its method of describing the details of putting money in stocks and becoming a profitable stock market investor in a volatile economy is concise, sublime and quite reader friendly. It draws on time tested approach to the principles of sound investing. The book comes in an all-in-one package made up of seven modules. Each module has a shared objective, which when combined with each succeeding one, describes a comprehensive methodology for staying ahead of the stock market in the business of creating wealth in the midst of market volatility.

According to research estimates, global issuance of equity and equity-related investment instruments totalled $505 billion in 2004. This is a 29.8 percent increase over the $389 billion raised in 2003. In the first quarter of 2009, the private equity industry also, was able to raise $46 billion. Which is in contrast to the over $200 billion they were able to raise in the second quarter of 2007 during the boom of investment opportunities.

This global surge in equity investments is quite significant on a historical level and the people’s heightened interest in investing in the stock market has been an important component of this process. Accordingly, shares now make up an increasingly large proportion of households’ financial assets in many countries. In spite of this positive shift, the new trend also comes with greater threats–more than ever–to investments across board.

Economic news in one geographic area of the world can now affect investments in another much faster than ever witnessed simply because, financial markets of the world are now more tightly knitted as a result of globalisation and the advent of information and communications technology. Consequently, investors in the stock market need to keep pace with the changing times. To survive the vagaries of a global village as it affects your investments, you ought to evolve a new way of thinking and taking certain decisions that have a direct bearing on your financial wellbeing or the wellbeing of others.

Unfortunately, a lot of individual investors are still stuck in their old ways of doing things thereby exposing themselves to all sorts of investment themes that seldom match the much anticipated success. Regrettably and with a deep sense of buyer’s remorse, such class of investors eventually shy away from the stock market poorer for the experience. If you have been on the receiving end of one of those reckless investment buzz that has brought nothing but misery or know someone who has, this guidebook will put you in a comfort zone. A zone where the code of investing profitably in the stock market is devoid of the three potential human weaknesses: greed, fear and mediocrity.

"

If you have been on the receiving end of one of those

reckless investment buzz that has brought nothing but

misery or know someone who has, this guidebook will put

you in a comfort zone. A zone where the code of investing

profitably in the stock market is devoid of the three

potential human weaknesses, greed, fear and mediocrity

"

As we proceed, it is worth emphasizing what this guidebook is all about and what it will not dare to do. It is not about promoting or debunking investment strategies, since there are a great deal of analysts and brokers who do the former and a plethora of sceptics and cynics who do the latter. Rather, it is all about providing you with a full picture of each investment technique so that you can make your own judgement about what works for you in the market and what does not. It is about providing you with the base knowledge that will spur you to ask the right questions when confronted with stock market volatility.

It is not a guidebook for pessimists who are convinced that deciding on stocks as an investment channel, is an exercise in futility but for optimists who want to consistently profit from an increasingly volatile stock market. It is about things you can and should do as a beginner investor to safeguard your investment capital from risk and at the same time, improve your chances for financial success. It is simply about you–to put it in clear terms, taking the bull by the horns.

With each passing decade, the euphoria in the stock market rises. Media analysts, financial writers and market watchers world over, relentlessly compete to get vulnerable investors’ attention at all cost. At the same time, individual investors are swapping questionable and most often, misleading investment tips in various online commentaries, weblogs, chat-rooms and other investors’ forums. Yet, despite the tons of available information, lots and lots of investors still find it increasingly difficult to profit in the stock market especially during a global recession. Here in this guidebook, I will simplify the characteristics of the stock market and provide you with a well researched step-by-step approach to genuine investment success.

Investment Planning

"Today I will do what others won’t, so tomorrow I can accomplish what

others can’t."

– Jerry Rice

When it comes to your finances, do you persistently have that flogging a dead horse feeling when faced with making ends meet before the next pay cheque? Do you also procrastinate when it comes to investing in the stock market in order to adequately provide for your tomorrow? If you are nodding your head as you read this, then your problem is half solved–you are not in self denial. Your top of the chart reasons for not making out time to invest may be that you feel that you cannot afford the extra cash, period.

On the contrary, I will say that you just do not consider it worthwhile to organise your personal finances. Other excuses that may abound are, I do not consider it worthwhile, Investing is too complicated for me, It works best for the rich and world famous, It is too risky and time consuming.…

If you find yourself giving any of the above reasons, then I have news for you. The fact is, you do not have to wait till you start earning mega millions a month before you can start planning your finances. Besides, there is nothing confusing about investing, most especially investing in the stock market. Moreover, in life, all human endeavours will always come with a commensurate level of risk and reward trade-off. Last but not least, it does not take much brain power to grasp the basics that can make all the difference in your financial life.

Straightforward information on investing in the stock market is your only powerful toolkit with which you can find real lasting financial success. Funny enough, the biggest risk you will face in life is not acquiring the right information that will help you achieve your goals and failing to decide for yourself, how best to approach the investing process. Metaphorically speaking, your investment knowledge will be your resourceful roadmap to your elusive El Dorado–a place of lasting financial possibilities!

"

It is normally said that those who fail to plan, plan to fail

"

All investment procedures involve a lot of planning. Regrettably, this is not the leisure interest of choice for most individuals. Yet, all your financial needs can only be met by devoting every minute of your time to planning as you go about your day-to-day activities. It is normally said that those who fail to plan, plan to fail. Along these lines, without a lifelong investment plan, the various pieces of your financial life would not magically fall into place. Your ever growing needs and wants will still have to be met if not for anything else, for the benefit of those who depend on you for their welfare.

Therefore, to be able to adequately cater for yourself and dependants, a practical approach to an investment planning course becomes inevitable. In order to make sense of your finances, you require more effort than ever in today’s constantly changing and fast-paced global economic environment. You are likely to have conflicting financial needs but at sea on how best to tackle each and every one of them. Here in this module, I will reveal to you how you can actually begin to do the right thing and be able to come out tops!

This right choice begins by taking charge of your financial life. It begins with starting on a clean slate and rearranging your priorities. It begins with your investment plan in its entire ramification. Your investment planning process kick-starts by knowing who you are, financially speaking. By so doing, you may be well able to manage your money more efficiently than before and with a clearer focus on attaining your long term goal of financial independence.

Financial independence is the freedom from the shackles of pay-slips and allowances. This self-sufficiency when it comes to money has remained elusive to many simply because they avoid making calculated decisions and taking firm actions that will positively influence their future financial wellbeing. Sometimes, these peculiar set of people just do not know what action to take simply due to a seemingly lack of resolve. If you fit in with this peculiar group of people, know too that there is an efficient remedy.

The required antidote lies in building a solid investment foundation. Most builders understand that laying a strong foundation is the key to constructing a good home. Get the job right, the house will be stable, do a shoddy job, it collapses. This same logic applies to your personal finances. You are most likely going to achieve your financial goals if you have a clearly defined foundation–an investment plan for channelling your income to different productive ends. The process of drafting this plan simply involves itemising all relevant financial information about yourself such as, your basic income, your investment objectives, your expected rate of return on such investment, any anticipated individual future cash flows, your investment time horizon and investment constraints if any.

Based on these and other external factors working together, you and/or your financial adviser can create a comprehensive investment or asset allocation model. An investment or asset allocation model determines how your money is going to be shared among the various available investment channels that are available to you and how these apportionments will be financed within an investment period.

Your ideal model should most importantly, inculcate all possible outside risk factors that could impede on your investment and calculated means of mitigating them. The benefit of this process is that it compels you to reconcile potential conflicts among the different objectives of your investment channels before those conflicts negatively affect your overall performance. An effective investment allocation model must also be based on reasonable estimates of risk-adjusted returns from the various channels that you opt to invest in.

An asset allocation model serves as an indispensable master plan for focusing on an approach to investing in the stock market so that it best serves your specific needs and characteristics as an individual investor. It suggests how you plan to invest given different degrees of risk and market conditions.

At this point, be reminded that an ideal asset allocation model is just what it is. It is not a template for all manner of investors. Rather; it serves as a prototype that could be adapted to suit wide-ranging income streams in such a manner that it best serves its intended purpose.

Your investment plan must also be able to accomplish your financial goal within a given time frame. This is the time you have set aside for yourself to actualise your reasons for investing in the stock market. You could have a one, four or five-year investment time frame. No matter how long or short you choose to make yours, your success will depend on the nature of your investments and how you are able to alternate your investment capital among the different classes in anticipation of different market conditions.

"

In order to succeed like the market gurus of

our time, knowledge gathering is vital

"

You probably must have heard a couple of investment success stories such as Warren Buffet’s or Ben Graham’s. You might have even heard about Peter Lynch or the king of the currency markets–George Soros. These great minds made stupendous wealth from the financial markets and their models are being replicated globally. Their celebrated achievements were not merely by guesswork. Rather, they were influenced by certain common goals and backed by certain models and individual investing characteristics.

In order to illustrate the essence of planning when it comes to investments, I will share with you, the secret of their success. This secret is not a well kept one but has eluded many investors because of their haughty and undisciplined approach to the workings of the markets. By discovering their key to enormous wealth, you too could replicate the same level of triumph for yourself. The key to profiting from the stock market lies in certain exceptional attributes which are either inborn or honed over years of learning and active involvement in the stock market. These unique attributes which are rare in today’s speculative circles, form the only common tie among these men of authority.

In order to succeed like the market gurus of our time, knowledge gathering is vital. One thing this guidebook will not fail to do is to provide you with an adequate amount of information that will help you achieve your investment dream which will last you a lifetime. It can make you whoever you want to be but you must master and follow its tenets. To plan your investment in line with the gurus, you need to get the right knowledge which will overtime, equip you with an uncanny sixth sense that will enable you to better understand the irrational ways of the stock market.

With such rare knowledge, you will imbibe extraordinary skills for identifying profitable opportunities that are obscured by noise in the stock market. You will amass the leverage to play the stock market like a pro and you will gain the confidence to take advantage of infrequent market opportunities as they occur without second guessing yourself. As it is often said, profit in the stock market comes to those who have what it takes to smell a deal and still keep a cool head in the midst of the maddening crowd!

Ben Graham put the word margin of safety in value investors’ stock market compass. The opportunities that the margin of safety provides only occur during market downturns and can be found in value stocks with beaten down prices. Warren Buffet, a protégé of the late Graham, was able to hit it big time simply by loading up on undervalued companies that were obviously selling at great discounts.

George Soros made billions of pounds by simply sticking to a plan that ran contrary to the common view in the currency markets. A contrarian strategy that is linked to Graham’s and Buffet’s value investing!

"

As it is often said, profit in the stock market comes to

those who have what it takes to smell a deal and still keep

a cool head in the midst of the maddening crowd!

"

To this end, developing your ideal investment model is not a one side fix all approach. In essence, it is all about having the right reflexes and mental strength that are refined, tested and proven by mixed experiences both during up, down and sideways trading stock markets. Such virtues can only be passed on to a beginner investor by a veteran so to speak and like wine, you will only get better and better with age.

The techniques and the characteristics of the most successful investors of all time are similar but peculiar to each market scenario. Nonetheless, by following a comparable path, you too can bring upon yourself, fame and much fortune. If you do not understand the reasons for investment planning and the immense benefits it could bring you, in all likelihood, you will do a less than adequate job investing in the stock market. You will ultimately, defeat your very purpose of putting your money at risk even before you ever get started. Whatever is your purpose for being in the stock market, endeavour you incorporate the following inexorable investing commandments or rules to live by for the beginner investor.

A Beginner’s Rules of Market Engagement

RULE #1

Resolve what your investor profile is

What is your profile as an investor? In other words, are you in for the long term in the stock market or are you just trading the stock market trends for a quick profit but with a higher risk of loss? Is preservation of capital your priority in the stock market and therefore, making you risk averse or are you looking for a long term growth of your principal and willing to take on the calculated risks that comes with market volatility?

What are your goals for being in the stock market in the first place and when do you expect to accomplish them? How do you handle specific risk–the possibility that you may lose all or a substantial part of your money in a particular market sector or security?

These questions require vital answers before you venture into the stock market. Carefully consider your means and motives. Look at your personal risk profile. Determine your risk tolerance level–how much you can safely afford to lose in the event of a stock market crash and most importantly, know how long you will be prepared to wait for the stock market to stabilise in order to recoup losses.

In essence, you are expected to gauge your resolve to continue investing even when share prices are at their lowest ebb. Your honest answers will determine your capacity to balance risk with great rewards as you invest your money against many odds in the stock market. Invest only as much as you can afford to after meeting your personal expenses.

RULE #2

Pre determine your source of investment capital

Sourcing capital for investment in the stock market will be your primary challenge in the quest for long term wealth. Many would-be investors will learn in due course that the size of one’s investment capital will determine the size of one’s risks and returns. First, resolve where the money to be invested will come from.

Do you have enough savings or disposable income? Do you intend to use a family inheritance? Do you have access to brokerage margin loans? By having a good knowledge of your personal finance and a disciplined personal budget regime, you can compound your meagre income into a substantial financial leverage for market opportunities!

RULE #3

Choose the most profitable way to spread your investible capital

A well-diversified investment portfolio is your armour in the stock market. You must familiarise yourself with the various asset classes. How do you pick the right stocks that will get you to your investment destination in record time especially in today’s volatile markets? Will you by any chance be interested in putting your money in asset categories other than stocks? How will you share your investment capital among the different asset categories?

Investing profitably is all about identifying investment vehicles with an above average quality characteristics. Graham observed that the greatest losses result not from buying quality stocks at an excessively high price but from buying low quality stocks at a price that seems good.

The ability to tell good investment prospects from the bad in the stock market is a skill which requires copious amounts of insight, none of which can be acquired without actually being in the market yourself. But you can learn from a veteran by reading about his experiences and all the subterfuge that our forebears survived with through years of recorded economic booms and market burst.

RULE #4

Select target investments based on verifiable data

When picking stocks, would you concentrate on well-known and established company stocks or would you just prefer young relatively unknown companies but with greater prospects for growth? Do you know any stock valuation method? Can you cultivate the discipline to regularly review your investment in order to determine if its value is increasing or otherwise? How best would you evaluate your investment returns? An ignorant investor will act on impulse and speculate by trading the rumour mill while playing the market.

Preferably, find out for yourself what makes the stock market tick. Carry out research by investigating all the facts available to you and leave nothing to chance. There is no substitute for legwork and company research in investing in stocks. You will need to monitor your stocks and keep in touch with market trends not only in the economy but also in the physical and social environment–in politics and in war world over.

RULE #5

Make a mental note of your reasons for all your investment decisions

As you make buy and sell decisions, set a reminder or send out a memo to yourself on why you are making those particular decisions. It should be your investment goal to make the best judgment and take the best financial decision based on verifiable and invaluable market information. You cannot accurately predict the future when it comes to market volatility driven by human emotions. Therefore, when unforeseen market events occur as they always do, simply review your fundamental reasons for making any of your transactions in the stock market. If they are still valid, dismiss any market noise and stick to your plan.

RULE #6

Remove sentiments from your investment decisions

The stock market as a whole does not care what you think about a stock. In fact, there are other investors on the other side that will have an exact opposite view of what you think is the future prospect of a particular stock. When you purchase a stock, it is undeniably depressing to watch it drop by over 10% a couple of days later. On the other hand, you will most likely feel like Warren Buffet or some other stock guru if a stock that you just bought experiences a price surge just few days after your investment purchase.

These emotional ups and downs come naturally to investors in the market but it can also be detrimental to your long term investing success. They have the ability of leading you into making irrational decisions that can hurt your investments. Take for an example; you have a stock that just had a bad operating quarter which led to a decline in its quarterly profits. You quickly join the band wagon and selloff only for the same company to declare an astounding full year result with good dividends and share bonus issues.

How then should you guard yourself against being emotionally attached to your investments? First and foremost, be prepared for the inevitable market volatility. Before any buy or sell decision, draw up a plan of action in the event that the market goes against you. Will you cut your losses and run after a certain percentage decline in your portfolio value, will you average your cost by buying more of the stock, which could bring capital gains with a rebound of a lesser magnitude or will you be willing to do just nothing but stick with your selection till the market realises its folly? By anticipating all possible future events in the market, you will be better placed to deal with them when they become a reality.

RULE #7

Spend quality time doing research

When putting money in the stock market, a lax understanding of what you are doing is much worse than not understanding it at all. Value research of company shares is non-negotiable. With a good research foundation, you should be able to explain in detail to another person why you have chosen to invest in a particular stock and why you seem not to be bothered by short term volatility. By verbally explaining the rationale behind your investment decision, you will be able to hear any bias in your own judgement.

RULE #8

Re-examine every investment opportunity

Regardless of your investing strategy, a consistent evaluation of each stock you hold is required. By taking the time to re-evaluate each stock holding, you allow yourself the opportunity to keep abreast on its financial numbers–the very thing that will make all the capital gains possible. Once an investment is made in a stock, your work is far from over! You must also keep track of stock moving events that could affect your investment negatively such as company press releases or the general economic cycle.

You should at least, review each investment and see if your original reasons for buying in are still very much valid. Who knows, the recent global economic recession could present value buying opportunities!

RULE #9

Always have a long term view of the market

With the advent of information and communications technology, it is now quite simple and fast to get stock quotes, company news, press releases and any other financial information from the internet. While this readily available information is definitely helpful, you must also avoid being caught up in the day-to-day market hype or noise. The media most times, over-hype events since it is in their interest to top the ratings!

RULE #10

Choose a registered and reliable stockbroker

Stockbrokers and professional advisers are your market liaisons–the gatekeepers to the financial world of physical and virtual stock markets. They are licensed dealing members in various stock exchanges and their advice and recommendations can make or gravely mar your investing experience. A seasoned stockbroker with a good record of financial accomplishment can be a powerful partner in your pursuit of great wealth. Choose yours wisely just as you will choose a good divorce lawyer, sparring partner or brain surgeon.

Ask for references for good stockbrokers from trusted investors who are ahead of you in the market and seek out their services. Reserve the right to make the final decision on whether to buy or sell any investment. When choosing a stock broker, one should interview several brokers such as the full service brokers, discount brokers and other financial professionals. This will serve as a good means to view their operations history, ask about their market experience, transaction costs and finally their investment strategy. You can request for a list of brokerage firms from the Securities and Exchange Commission within your investment jurisdiction.

My Humble Beginning

Looking back with nostalgia, I started out in the stock market in my teen years when investing in stocks was an uncool thing to do with money. I can still remember what it felt like when I first held my first share certificate. It all seems like yesterday now but in the beginning, it was everything but easy. Do not get me wrong. I was not a nerd or some geek who had no friends and had to stay indoors to study for long hours. In fact, I had a ring of friends that would have rivalled your today’s Facebook profile.

In spite of this, my eyes were filled with a burning, deep-seated passion for only one thing and one thing only–the stock market. I still cannot figure out how my love for the stock market came about especially when stock trading was not a fashionable means of making a living within my locality. I can’t also say that I had a stockbroker next-door neighbour whose lifestyle fascinated me. Nevertheless, I did know that money was being made in the market. Deals were being brokered, signed and sealed and I yearned to be part of it.

Naturally, economics became my favourite subject in high school and I chose my degree course in the same line. When my opportunity came to stake my claim, I was only able to achieve my financial goal because I had a disciplined and well thought-out investment plan that was driven by an immense passion prior to my first stock buy.

Before taking my first baby step into the world of the financial markets, I resolved to be in it for the long haul and as months rolled by, I diligently put away a cheap amount of money at regular intervals. To reinforce my savings plan, I decided to get a holiday job as a computer operator with a small-scale I.T. firm. It served as an alternative source of income beside my monthly allowance as a student. Anything that did not go into books–which was about my only major expense at the time, went into my savings account.

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Your first stock investment should be the most boring but safe

investment you can find in the market. It should be your hands

on experience on how the stock market works and how economic

and political stresses can affect you personally and financially

"

Then, the opportunity came. The Edo and Delta State Government of South-South Nigeria resolved to divest their holdings in an ailing financial institution, New Nigeria Bank (NNB) as it then was, and I had a hundred and twenty thousand naira in savings ready to be part of a looming opportunity. During the government divestment, I bought two hundred thousand units of NNB shares at the share price of sixty kobo through a public offer for sale and subscription.

My investment objective was simple and based on a worst-case scenario. If the bank were to go bankrupt and its assets liquidated, taking a position in the stock close to nominal value and assuming that every going concern is worth more than its nominal value, then the odds are that I will come out with some gains when the bank’s assets are factored-in in its liquidation.

However, things turned out better than I had expected. The coming of the Nigerian banking industry recapitalization and consolidation exercise in 2005 brought with it, good tidings. Stock prices were going off the charts–breaking new highs on a weekly basis and between 2005 to the third quarter of 2008; a market bubble prevailed in the Nigerian stock market.

In the midst of the bullish trends and the ensuing market bubble, I did the most natural thing. I sold my holdings in NNB after a four-year holding period at about five naira per share and made my first million excluding capital gains taxes! The experience was the first of many things to come and I never looked back.

Opportunities like mine abound in varied shades in stock markets all over the globe on a daily trading basis. All you need is the wherewithal to see the opportunities as they appear and the leverage to capture them. What you need do in your own case is not necessarily to wait for a government divestment exercise before you can make an inroad in the stock market–although this could be a very tactical entry strategy now that governments are playing recovery roles in many corporate casualties of the financial meltdown.

Rather, your first stock investment should be the most boring but safe investment you can find in the market. It should be your hands on experience on how the stock market works and how economic and political stresses can affect you personally and financially. As a first timer in the stock market, please do not put your money at risk without the right knowledge. A seasoned student will not only learn from books but also from analyzing the experiences of others before him. Therefore, to make a concrete start in the art of investing in the stock market, you need to first of all, finding a middle ground between spending your money today and putting some away for tomorrow.

By so doing, you will have the opportunity to grow your money for investment opportunities while making sure you are managing your expenses within acceptable limits. Investing is all about making your money work for you. Managing money has never been an easy task so in order to be good at it; you need to focus on what money really is–a means to an end–an end which could mean more money.

Keys to Successful Investment Planning

Key #1

Plan Your Way out of Debt

With your investment plan tailored in line with the golden rules of the game, I know that you cannot wait to take your first step towards taking charge of your finances. Nevertheless, before you go any further, one issue still needs to be tackled. Your success in dealing with this issue will determine the life span of your investment plan and its capability to actualise your financial goals. The first action you are expected to take before you can successfully execute an investment plan is to get out of excruciating debt.

We all incur debt in the course of our day-to-day lives. All humans do, though some rake in more than others. With our conflicting desires, we are continuously caught up in the web of meeting our needs and wants. Any attempt to meet these desires all at once without a concrete framework, usually results in uncontrollable debt. Do not get me wrong. Debt in itself is not really such a bad idea. The big question is how much debt should you have at any given point in time? Ideally, no debt would be the best answer but we have to be realistic and accept the fact that in order to acquire some categories of assets, it is required that one borrows money.

For example when taking out a mortgage, most mortgage experts agree that your total monthly payments should not