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Financial Literacy

Why You Should Not Invest Like Warren Buffet

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Warren Buffet is one of the richest men in the world and is also one of the most talked about, respected and followed investor in the world.

Warren Buffet, unlike many other investors has a style of investing that is quite unique to him and has proven to be successful for over 3 decades. Investors in Warren Buffet’s Berkshire Hathaway have seen the value of their investments grow exponentially over the years through a style referred to as Value Investing. Through value investing, Warren Buffet ignores the short-term nature of technical analysis, relying on the business model, corporate governance and competitive edge a company has to invest in it for the long-term. This process is called fundamental analysis and differs from technical analysis which relies on past information about the share price movement of a stock by using charts and other statistical analytic tools to predict the future price of a stock. Fundamental analysis includes a comprehensive understanding of the business, its risk profile, competition, capital structure and most importantly what Warren Buffet calls an economic Moat.

 

Warren Buffet is one of the most respected investors in the world. However, trying to emulate him as a retail investor can lead you to huge financial losses if you do not understand what makes him different. There are several reasons why you cannot invest Like Warren Buffet.

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Pool of Funds – Unlike retail investors who mostly use their funds to invest, Warren Buffet doesn’t only use his own money to invest. When Warren Buffet started investing in the 60’s he pooled money from wealthy working class Americans that he knew at the time to form a sort of mutual fund. That fund went on to buy companies that even made him more money that he could use to broaden his investments. One of his major cash generating machines is an insurance company called Geico. Warren Buffet collects the money paid as premium for insurance and invests it in business that help it make even more money, Warren Buffet, recognized the power of cash flow (see below) and as such started by pulling together a good cash balance that helped him apply his value investing techniques. For a retail investor who is investing his own funds, it is foolhardy to believe that you can buy very good companies that will provide you cash flow to buy other companies. For example, a company that pays Warren Buffet 10% on a $1 billion (N200 billion) investment earns him $100 million (N20 billion). This is starkly different from 10% on N1 million which gives you N100,000 annually.

Cash flow – Warren Buffet and his Berkshire Hathaway investment company is said to have over $60 billion in cash to invest into companies. To put it into better perspective, Nigerian had under $28 billion in foreign exchange reserve as at the end of April 2016. With that sort of cash, Warren Buffet can cherry pick companies that he wishes to invest in. They can also use that cash hoard to buy into more cash generating companies that will even help to yield more cash (Geico as explained above). When he also buys companies, he buys significant proportion that can either give him a sit at the board or significant shareholdings that will give him a say in how the business is run. Retail investors hardly have more than N5 million annually to invest at any one time. Unlike, Warren Buffet you do not have a similar cash position and surely can’t buy significant portions of businesses as he does. This means, target companies don’t even know that you exist or that you are even their shareholder. You have no way of influencing their operations.

Bargains – We talked about Warren Buffet’s Cash flow. One thing cash flow does for you is that it gives you the ability to get deals at a bargain price. At the height of the financial crisis in 2009, Warren Buffet was given an offer by Goldman Sachs (one of the world’s biggest investment bank) to buy $5 billion worth of shares in exchange for a 10% dividend yield and a warrant to buy another $5 billion worth of equities at a price of $110. This was during the financial crisis in 2008 when Lehman Brothers (another leading investment bank) had just collapsed. In 2013, Warren Buffet exercised his rights at bought $2 billion worth of Goldman Sachs. At the time Goldman Sachs was trading at $158 thus giving his company a profit spread of $43 per share. Not everyone can get this sort of deals and I don’t see any retail investor who can ever get one. Bargains prices can be gotten during block buys from the Nigerian stock exchange but only institutional investors can get such deals because of their financial muscle. Retail investors cannot get such deals.

Significant Purchases – Value investing requires that you purchase shares in companies that have very sound fundamentals. However, because companies are run by human beings it is likely that, it is likely that it will one day be run by a poor management team. Warren Buffet understands this which is why he once said, he like to buy companies with business models that are so good, they can be run by a stupid person because someday a stupid person will run it. Warren Buffet makes sure a stupid person does not remain in that company for much longer by buying a large stake that gives him a say on how the business is run. If things get so bad he can also sell down his share which managers of the business dread.  In addition, Warren Buffet can also purchase significant portions in very well run companies giving him an opportunity to benefit even more. In Nigeria, retail investors can only purchase as much as their portfolio allows them to even when they see a company that has incredible value. Your purchases may not be significant enough to give you maximum returns.

Resources – Unlike you, Warren Buffet has a vast pool of professionals who are paid to help him analyze financial statements and businesses of companies that they own as well as prospecting businesses. These guys spend all their time sifting through countless financial statements looking for businesses that they can buy or sell. As a retail investor, you probably have a regular job while jostling through other time-consuming activities. There is not enough time to properly analyze investments the way Warren Buffet and his team would.

Income Model – To Warren Buffet, his major way of getting a return on his investments is via dividends. He likes to buy companies that have a long-term record of dividend payments and will most likely continue to pay him dividends for as long as he is invested in such companies. He hardly sells his shares in the company’s that he owns. For a retail investor looking to copy this model, you have to ask yourself if it is really worth it considering the amount you invested. Going back to the cash example, if you invest N1 million in a company that pays your N100,000 dividend yearly would you prefer it to taken a more risky approach of investing in a company that can appreciate by 10% within a month?

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Shareholder Power – In America, retail investors are better protected via strict rules and regulations that help ensue financial transparency. Nigeria is just getting there as most quoted companies still see them sell has political institutions rather than as financial institutions with a responsibility to be transparent and accountable to shareholders. Without shareholder power or activism it is difficult for a retail investor in Nigeria to highlight poor corporate governance within quoted companies. This makes investing long-term in companies extremely difficult. As a small time shareholder, you can own shares in your company and never earn a dividend. Even when you decide to sell and take a loss, you might not see a single buyer for your shares. You are basically at the whims and caprices of the managers of the company. All Warren Buffet needs to do is just to utter a word of resentment.

US Economy – Unlike the Nigerian economy, the US economy is the world’s biggest and most competitive economies. For example, the economy of a state like California in the US is about 4 times that of Nigeria. Due to its size and sophistication the American economy is built to be resilient to global economic meltdowns which can lead to a contagion. Even when the US economy goes through a major recession like it did in between 2009 and 2011, they have the resources and the ability to turn it around. Nigeria on the other hand is fully dependent on the global economy to survive. With oil being our single largest income earner, a drop in the price of oil and indeed other commodity prices will negatively impact on the economy. For investors who wish to invest long like Warren Buffet, it is tough to hold your investment on the long-term in a world of boom and bust cycles, where the economy boons for three years and them bust for another three.

Finally, to be as successful as Warren Buffet it is important that retail investors understanding the leverage he has. Whilst a lot of his techniques and virtues can be imbibed, it is important to recognize your limits as a retail investor and why you can’t possibly invest like him. Your risk appetite as a retail investor must be more aggressive than Warren Buffet if you wish to be successful.

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Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.

2 Comments

2 Comments

  1. Bola Oyebo

    May 1, 2016 at 6:41 pm

    Excellent analysis!

    My challenge with value investing in Nigeria is reliance on Financial Reporting solely on annual reports can be misleading. Intelligence from “grape vines” sometimes tell a different story of the true state of affairs. It makes you question the role of auditors in these reports.

  2. Legend

    May 1, 2016 at 10:53 pm

    Buffet is the son of the Fed. I like him anyway.

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Financial Literacy

Five things to consider before securing a loan

It is important to consider these five tips before securing a loan.

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Financial security is when you know you do not have to worry about the basic needs of life. It also involves having the courage to comfortably withstand any emergency life throws your way.

The outbreak of COVID-19 was unexpected. Apart from the health implications it caused, the global economy has suffered greatly.

The outbreak of the virus resulted in job losses and business closure. The situation is so worse that even stable sources of income are no longer guaranteed.

As a result, many people have had to reduce their expenses, and the need to seek loans to enable sustainability or survival is on the rise.

While many may consider taking loans to meet their current needs, here are five (5) tips on what to consider before taking that step.

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1. The lender

With different financial institutions willing to offer loans, it is crucial to find the right lender. At a critical time, such as this, securing a loan can come at significant risk and cost. It is, therefore, essential to get it from a source that will provide acceptable terms. It could be from a friend, family, community fund or a microfinance bank. Ensure you secure the loan from a lender willing to give you the best possible conditions and a well laid out repayment plan.

2. Do Your Homework

Research is key. Do your homework and be well informed about it. Ensure you have a realistic means of repayment. Look at the viability of the loan and ensure that you have a realistic chance of paying back on its due date.

3. Work Out Your Payment Plan

Many focus on planning on how to spend a loan and determining how much they need to secure. While this is essential, it is equally important to plan on how you will repay a loan. It would be best if you decide whether you will be paying on a weekly or monthly basis. These factors will guide you in choosing a loan with favourable payment terms to avoid unplanned costs.

4. Credit History

Having a good sense of your credit history is also very important. Know your cash flow and be sure of your income and expenses. Know the precision in terms of what you can get and when you can get it, so as to draw up an excellent and reasonable payback strategy.

5. Terms and Conditions

Ensure you read the fine print and understand the various terms and conditions of a loan before signing any legally binding documents, including a personal loan agreement. In some instances, you may find it difficult to understand certain things regarding the loan you are about to secure. Try as much as possible to clarify all doubts before taking the final decision.

Financial strain may not be the sole purpose of taking a loan. However, whatever the reason may be, it is crucial to consider these five tips before securing one.

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Personal Finance

10 things to adopt in your business to adjust to the new normal

As scary as the thought might be, the new normal might last for a very long time.

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Nairametrics Financial literacy, invest intelligently, portfolio diversification, treasury bills, Your next of kin, or not?, Investing in uncertain times, Things to accomplish during COVID-19 lockdown

Towards the end of 2019, many businesses wrote their plans, strategies and goals for 2020 and were ready to dominate the market. However, the year did not start as many thought it would. The COVID-19 pandemic brought about new ways of doing things, which is now known as the ‘new normal’.

As scary as the thought might be, the new normal might last for a very long time. Therefore, businesses need to find a balance between what worked in the past and what needs to be done to adjust to the new normal. While some businesses were forced to shut down, many businesses had to change their strategy in order to adjust to the new normal.

Any business can survive the pandemic and adjust to the new normal just by pivoting to a new business strategy. As a business owner, you have to think about growth and look for methods you can adopt in your business to adjust to the new normal and remain relevant. Keep reading to discover ten (10) things you can adopt in your business to adjust to the new normal.

1. Accept the changes 

The first and most important thing to do for your business to adjust to the new normal is to accept the changes and embrace the new normal. Waiting for things to go back to normal before you continue your business is the wrong move because things might never go back to the way they were.

2. Think Technology 

Innovation and the use of technology in businesses have been on the rise, before the pandemic. Technology is the future of the business world. The latest trend since the pandemic started is to replace manpower with technology. With this, the business continues without endangering the lives of the employees.

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3. Change your business model

Reinvent your business, align your business strategies with society’s changing needs and develop a low-cost business model that would help you to stay in business while delivering your best.

4. Involve your employees

The business world has reached a level where you have to involve your employees in the decision-making process. This gives them a sense of responsibility and makes them more involved in the growth of the organisation. Involving your employees will help the business to adjust well and experience growth.

5. Focus on your customers 

Listen to your customers. Make an effort to meet their increasing demand and take advantage of their changing attitudes and behaviour. You can do this by conducting a survey and requesting feedback. This is the best time to conduct market research and get all the information you need. This way, you would know if you are on the right track.

6. Stay connected

Transitioning from the current state (Covid-19) to recovery state (Post Covid-19) requires staying connected to the outside world. The question; ‘what is working or not working for other businesses?’ should be asked as often as possible.

7. Adopt a mobile strategy

Since the beginning of the pandemic, the majority switched to remote working, which might have brought about a reduction or lack of communication for some businesses. Business owners should work on their communication system during this period by employing a mobile strategy to get employees up and running.

8. Focus on advertisement and marketing

To cut costs, many businesses are cutting their advertising and marketing budgets, so any business that focuses on advertising and marketing will get all the attention it needs now.

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9. Collaboration, flexibility and accountability

The best time for flexibility, collaboration and accountability in business is now. Adopting systems such as informal interactions and remote work would help build a flexible, accountable and better workforce. Not only will this make your employees happy, but it will also give your business the exposure it needs.

10. Risk management systems

Businesses should take advantage of this opportunity to set up a risk management system. The pandemic is enough enlightenment for businesses to know that they should put measures in place to identify, assess, monitor and mitigate the impact of risk on their business in future.

If your business has been affected by the pandemic, you can get back on your feet and begin to break new grounds. All you have to do is adjust your business to the new normal by thinking differently and being strategic in all dealings.

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5 ways to raise funding for your business

Here are a number of ways to raise funds for your business.

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5 things you can do to attract equity funding for your business

One of the biggest challenges that entrepreneurs face is finding the necessary funds to grow their businesses. Startups have to deal with various costs, while ongoing businesses have to finance growth and working capital. As money does not grow on trees, there are a number of ways to fund your business.

We will love to see your business grow and make huge impacts, which is why we have compiled in this article five concrete ways to raise the money you need for your business.

Bootstrapping

This means financing your company by scraping together any personal funds you can find.

In many cases, using the money you have instead of borrowing or raising is a great approach. In fact, some entrepreneurs continue to bootstrap until their business is profitable. This can be beneficial because it means you won’t have extensive loans and monthly payments that can weigh you down, and investing some of your own money will usually make investors and lenders more willing to partner with you down the line.

Friends and Family

If your funds are not enough, you can turn to the people closest to you. This is often a good first step before considering external funding. Family members and friends can be easier to persuade than anonymous lenders because they are less likely to demand stringent repayment terms or high-interest rates.

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Borrowing from friends and family comes with its own set of risks. If the venture fails, or if it takes much longer than anticipated to repay the loan, your relationships can suffer.

Before you ask your friends and family for money, you should have a business plan ready. This way, you can explain to them exactly what you are doing and how you will make money. Also, ensure that you have all terms of the loan written out. That includes how much you are getting, the amount of interest charged, and the terms and deadline of repayment.

Angel Investors

Angel investors are groups or individuals who invest their own money into other people’s businesses. They stand out because they tend to invest in companies at earlier stages of growth and are always on the lookout for the next business to invest in. Many of the biggest tech companies today, including Google and Yahoo, were funded by angel investors. Typically, an angel investor is one who is successful in a particular industry and is looking for new opportunities within that same industry, or other industries. Not only can angel investors offer financing to get your business off the ground, but some may also choose to guide you. They may also leverage their existing contacts within an industry to open doors for your business.

Crowdfunding

Businesses have been using the internet to market and sell things since the 1990s. However, over the last decade, the web has become a new source of financing as well. With this, you can get funding from websites where investors can support your business no matter where they are in the world.

You will be required to set up a campaign and name a target amount of money you want to raise, as well as create perks for donors who pledge a certain amount of money, such as early access to products, discounts, and so on. You then raise money for the campaign over a specified time. Some websites you would use for this financing method are Kickstarter, GoFundMe, Indiegogo, Crowdrise, and many others.

Loans

Loans can be gotten from banks or other financial institutions. This method is one of the oldest, although many do not prefer it.

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To get loans, you might be required to show that you’ve started gaining traction and making money (and that a loan would help you earn even more). You may also need to present a well-detailed business plan. Your business’ financial projections give lenders the details needed to be sure of the income you would have to repay loans, including interests. Usually, bank loans do have legal regulations, which will have to be followed accordingly.

In conclusion, entrepreneurs must weigh the benefits and downsides of available funding options and determine which one provides the greatest flexibility at the least cost. There are many options for financing your business, so do not get discouraged if one does not work out. By demonstrating due diligence and resourcefulness, you can easily raise the capital you need to move your business to the next level.

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