I started investing in stocks in 2008, when I was in my final year and I remember vividly how bullish the market was then.
A couple of my friends and I, with a peripheral view of what the stock market was all about, had been discussing for months about the importance of buying shares and getting rich easily from just buying some units of any company and watching the share price rise.
We finally agreed on a date to visit a stockbroking firm which one of us recommended and met with the Managing Director who was very excited to see “young men” interested in investing money in the stock market.
Shortly after meeting with him, we were directed to the appropriate department for payment, and I ended up investing in three stocks – an insurance company, a flour company and a construction company.
Looking back and reflecting on my decision, I decided to write about my experiences in buying these stocks. Here are the things I learned:
Not developing my circle of competence
According to Wikipedia, “A circle of competence” is the subject area which matches a person’s skills or expertise. The mental model was developed by Warren Buffett and Charlie Munger to describe limiting one’s financial investments in areas where an individual may have limited understanding or experience, concentrating in areas where one has the greatest familiarity.
The stock market is very broad, consisting of different industries, companies and asset classes; hence, it is very difficult for any individual to be 100% knowledgeable about every aspect of the market. Personally, I was just interested in investing in any stock and doubling or tripling my hard earned money in a short period of time.
What should I have done?
- Read daily newspapers, annual reports, industry publications and business journals to enable me get background info and develop a basic level of understanding for what piqued my interest.
- Taken advantage of everything that was of interest.
Focusing on share price instead of value
Before I visited the stockbroker, I used to scan the daily stock market reports and just went straight to share price to search for “penny stocks” that were trading between N0.50 and N3, thinking that they were cheap and hoping these stocks would triple in price so I could make a lot of money.
What should I have done?
I should have restrained myself from looking at the share price and instead focused on discovering the intrinsic value of the stock(s) I was interested in buying.
Discovering what the intrinsic value of a stock was, would have required me to develop a model which would have enabled me to estimate the value of a business first. Estimating the value of a business and linking it to the value of a stock would involve me estimating the amount of cash a business would be able to generate over its lifetime.
