By David Alade
I just finished another level on my CIS (Chartered Institute of Stockbrokers) exam, the learning points were intriguing and I couldn’t wait to participate in such a busy market as financial markets.
Beyond the CIS curriculum, I learned some other needed tools that are considered imperative for success, including Asset Pricing, Company Valuation using different methods, Financial Modeling, Japanese Candlestick among others.
All these were just exhilarating and I couldn’t help but find a way to put my knowledge to test, and I wanted to do this with actual money, not any demo trading. I should mention that around this period I read the book “Intelligent Investor,” so I had the theoretical understanding of value investing. And yes, I had what a typical Nigerian will call a “change” (Nigeria way of saying small money), so up I initiated the process to get my CSCS number and buy my first stock.
A novice mistake on NSE (Nigerian Stock Exchange)
From my reading of Intelligent Investor, I inferred that to be a value investor, you need to have at least a sizeable capital that is worth putting on equity for long enough to benefit from both capital gain and dividend. I did not have that capital and my ‘strategy’ was to benefit from capital gain, through buying and selling of stocks.
The first two stocks I bought were [withheld]) and [withheld]. Why did I choose these stocks?
I chose [withheld] because earlier I had a couple of people discussing the stock in my broker’s office, and they said “[withheld] is at a historical low, and the last time it was that way, [withheld] just ordered that all available stocks on the floor of NSE be bought. That triggered demand to be more than supply and hence the stock price jumped up.” They concluded by saying, such might happen again. The enthusiastic novice in me, just brought my hard-earned money and bought [withheld] with no analysis per se but with the hope of benefiting from market inherent inefficiency that I cannot even confirm. I will leave you to complete the story of how that went. In the stock market, hope is not a strategy.
[withheld], I bought it because of my illusion and fixated mind on the power of Japanese Candlestick. I bought it when the war between the bulls and the bears was strong and none gave in for the other. But historic trend shows the bears have been winning the war all along, so the natural thing according to me was for the bull to win the next face of the war. Chuckles! You will need to complete this story as well.
Purchasing those stocks taught me lessons that remain until today. You don’t invest in a stock because of ‘what they are saying’ nor because of one-sided story you choose to believe, have a holistic approach of analysis, and let it be in consonant with your strategy. The strategy you must have set before any analysis.
A novice choosing a broker
When choosing a stocking broking firm, I just registered with next available around me. I did not try understand them nor did I pay attention to what their performance was nor what previous customer have to say about them. The repercussion of this was a lesson well learned.
This was a hard-learned lesson that cost me money and I do not intend to make a similar mistake going forward on this journey. I gave my broker a Buy order for a particular stock, this time I did a proper analysis, at least so I thought. The order was not executed until the stock had appreciated by about 30%. The 30% should have been my gain but unfortunately, it was to my disadvantage, and after they executed the order the market started correcting itself. I had to pull out of the stock at par but suffered brokerage fee.
A novice’s lessons
- My entire reading had been about US equities market, arguably the most efficient financial market in the world. I thought Nigeria will obey the rule of thumb in equity trading, no it did not. Inefficiencies dwell on NSE (remember my [withheld] expectation, it’s a typical example).
- Choosing your broker is key to your success no matter what strategy you choose to adopt in your trading. This is because the ecosystem is a volatile, reactive and sensitive one, swiftness is key, any sluggishness will cost you a fortune.
- Never invest in a business you do not understand. Warren Buffett is credited to saying this and I can corroborate the validity notwithstanding the one who coined the statement. If I had understanding, [withheld] wouldn’t have been an option for me, it was that time a stock trading at tandem with value and the point I was referencing that triggered my hope in it was an example of an overpriced stock, benefiting from the gross inefficiency on NSE.
I have learned these lessons the hard way. There is a new wave of rising interest in investment opportunities and equity will always be a consideration, that’s why I thought it worthwhile for me to document my experience so the next novice won’t make similar avoidable mistakes that I made.