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Investment Tips

Time Value of Money Explained

TVM is a principle that everyone must understand how it works and its application in taking business decisions.

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Time Value of Money

Let us talk this week about the Time Value of Money (TVM). This is principle everyone one, not just finance or accounting folks should know about and apply. Yes, it involves math’s

TVM simply means cash in hand today is worth more than cash tomorrow, why? Because cash in the future will come under the influence of factors like inflation which will affect its purchasing power. TVM allows the investors to compare two separate cash streams, employing quantitative methods, and select the best option.

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For instance, you live in a flat in Lagos, your rent is N1,000,000 per annum, paid two years in advance. your landlord, informs you he needs cash and is willing to accept rent payment in advance for N900,000 for two years per annum if you paid now. You have two choices, pay N2m in full next year, or Pay N1.8m now. Which option will you choose?

A good way to solve this question is to ask how much in interest would an investor earn if the N2m is invested in a bank, that rate becomes our discount rate. Then compare this to the cash offer made by the landlord. So, we have our tenor of 2 years, we assume an interest payment of 5% per annum if money is put in the bank, we know our Future Sum is N2m. we want to determine how must that N2m paid in the future will be worth today.

READ MORE: Experts state how COVID-19 affects Nigerian real estate sector

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This we determine with a Present Value calculation. Present Value (PV) is simply the current value of a future sum of money, at a predetermined rate of return. PV in our example is calculated as

Present Value =FV (1+R) ^n

FV is Future Value or N2m

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R is the Discount rate or 5%

N is a period of 2

Thus, the PV of N2m invested for 2 years at 5% is N1,814,058.96. Now compare to N1,800,000 the landlord requested, we should not accept the landlords offer because the Present Value of N2m paid in two years is worth more than the value of N1.8m paid today.

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Keep in mind we have no way of knowing what the interest rate in two years will be. Thus, it’s always a good idea to have a sensitivity analysis where we can project out scenarios on interest rates, thus we can project with 6% or 4%. The higher the discount value the lower the PV of the cash flow

PV can also be used for just planning when making any comparison of cashflows. For instance, if you had a daughter aged 5 who wished to go to Harvard when she is 18, and the cost of Harvard tuition is $50,000. How much should you save as a one-time payment to a bank today, to have $50k in your bank account in 13 years?

Present Value =FV (1+R) ^n

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FV is Future Value or $50

R is the Discount rate or 2%

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N is the period of 13

You will have to save in bulk today $38,651. What happens is the discount rate doubles to 4%, then your bulk payment today falls to $30028.70.

READ MORE: CBN to integrate non-interest window in its loans to SMEs, households

In our earlier example, we used a single lump sum and calculated the Present Value, what if the payments in future were not a lump sum but instead were spread out into the future, in a stream of equal payments called an Annuity. The principle will still be the same, but we change the formula and use the Present Value of an Annuity to calculate Present Value

You earn N500,000 a year, should you request a loan of N5,000,000 today at a 5% interest rate, or simply save N500,000 every year to get N5m and spend.

Again to answer this we have to compare 5m less 5%  in cash today to the present value of an N500,000 paid every month. Again, our equation

PV is Future Value or N500,000

PMT is each stream of payment of N500,000

R is the Discount rate or 5%

N is the period of 10

The PV is N386,000. This means you are better off borrowing N475,000 today (500K less 5% interest cost), as it has a higher value than N386,000.

Today, you can calculate PV on your phone, simply plug in the numbers. You don’t have to be a math’s guru, however, you must understand the working of TVM and its application in taking business decisions.

 

Patricia
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Cryptocurrency

How to become a successful Bitcoin trader

Major steps that are needed if you want to become a successful BTC trader.

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BTC Whales, Bitcoin is scarce, entities, individuals hold for long term

A BTC trader is simply an individual who seeks gains from differential changes in the market price of BTCs. The main objective the BTC trader has in mind is buying prices alow and selling when the flagship currency gains higher. BTC trading can thus be very lucrative and has become one of the fastest-growing careers in the financial spectrum. 

Data obtained from a leading BTC analytic firm, Coinmarketcap showed that the market capitalization of BTC currently stands at over $170 billion. This further illustrates that in 2013 BTC moved from $13.30 to its present-day value of over $9000, meaning that early bird BTC traders had gained over 67,600% since it began. 

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Consequently, this article will show major steps that are needed if you want to become a successful BTC trader. 

Explore Research Data From Nairametrics by Visiting Nairalytics

Self-Control & Discipline  

Adebayo Juwon, an FTX consultant for Africa, spoke to Nairametrics in an exclusive interview, explaining in detail the need for a BTC trader to be very disciplined and have a security-conscious mindset. He said; 

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“Firstly I must note that trading is not for everyone, to be a successful crypto trader, self-discipline is a prerequisite to achieving one’s goal. The crypto market is very much volatile than what the traditional traders are used to, hence more risk and reward. 

“A crypto trader must be security conscious; you’re responsible for your account security in the crypto ecosystem, as hackers are preying on whose account is less secured.” 

READ ALSO: CBN provides guidelines to address credit, liquidity risks, others  

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Risk Management 

A successful BTC trader must be able to understand the relationship between reward and risk management. This entails high understanding levels about the degree of randomness in BTC market and the risk involved in taking such risk. As a successful BTC trader, you are required to understand when its best to trade BTC as market conditions change from time to time. 

Adebayo Juwon, FTX consultant for Africa also added vital points on why a BTC trader should never ignore risk management. He said; 

“Also, to be a successful crypto trader, one must have good risk management in place, in a highly volatile market your profits can be zapped away in minutes. Risk comes in different ways in the crypto market, there are lots of scam projects with the good marketing team, they tend to attract investors also, it’s very important to do your own research in the crypto space, and rely less on market sentiment.” 

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READ MORE: Tether mints 80,000,000 USDT to unknown wallets within 24 hours

Timing 

Recall that some days ago Nairametrics, revealed the best time many BTC traders prefer to take their trading positions in the BTC market, thus preferring to trade around the American trading session because of the high price swings that occur at the start of New York stock market trading time -about 2.30 pm GMT. This means there were higher chances of making more money at the start of  American trading sessions than other trading sessions (London and Asian trading session).  

 

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Basic fundamental and Technical analysis skills 

Every successful BTC trader must keep track of macro fundamentals going around the BTC community because such information more often determines the market price of Bitcoin.  Either rumours or news have exponential effects on the BTC market and often create lucrative trading opportunities. 

Chris Ani, a professional BTC trader in a phone chat interview explained to Nairametrics in detail, the major attribute every successful BTC trader must possess, including the need to have basic trading skills. He said; 

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 “To prevent yourself from becoming a slave to the market, you must be trading small enough size on your trades that you are not emotionally attached to them. Trading opportunities wait for no one. 

“You have no idea when and where they will appear. Whenever they appear, you have to be ready with your trading plan.  You must also master technical and fundamental analysis and most importantly the one that works for me, understand the seasons and market structure so as to know when to trade, allow big wins run, or rather exit the market in order not to lose your money.” 

Finally, it’s very important to understand that no matter how good you get at BTC trading, you will often make mistakes and lose money. Always remember, trades that go bad are part of what will make you successful in the long term. Success in BTC trading simply means you are winning more relatively than losing. 

 

Patricia
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Investment Tips

What bad stocks have in common with bitter relationships 

The feeling you get from marrying the wrong partner is similar to that felt after buying the wrong stocks.

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I have always argued that stocks cannot be summarised into one statement for a newbie, until recently when a friend told me that it could.  

“Simply put, buying stocks can be likened to relationships, he said.  

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did not immediately agreebut over the next few minutes, he explained to me what he meant, and drew several analogies to back his claims.  

While he is no expert, I understand that he has drawn his conclusion from his experience buying stocks for himself over the past 5 years, so I took his points seriously. These points have been summarised in this article. 

READ MORE: Cocoa prices melt lower as COVID-19 weakens demand 

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When it crashes, there is no telling how far it can go  

My friend mentioned of some company’s stock he bought in 2016 in the hope of selling short-term. At the time he bought, there was a dip and he expected things to pick up within some months so he could sell-off.  

Two years later, the stock price had plummeted 50% down from the price at which he bought. Without saying, he became a long-term investor because he was not ready to sell off at a loss.  

 

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How does this liken to being in a bad relationship?

As the value plummets, you keep hoping it will rise again and then before you know it you are stuck for the long haul. Same thing can happen with a wrong partner. You remain there hoping things will be better but it gets worse. 

It could happen sometimes that a company’s stock market price comes crashing and it never goes back to where it was againThe factors which triggered its fall, may not even be able to return it to its starting price.  

 

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The stock price is not indicative of the company’s profitability 

For some reason, there are company stocks market prices that remain low year after year despite the billions declared in profits, and the dividends paid out to shareholders.  

Sometimes, the stock market price could still slump even when the company has positive records in its financials. Market experts are not always able to explain this, but it remains true. Some of the most profitable stocks are undervalued.  

 

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You can never take stocks at face value

That a stock has been on an upward trend in the last few months does not mean it will remain so. One must always consider several other factors before purchasing a stock.  

While it is important to look at past performance, there are other things that could point to the likely future of such stocks. 

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Say, for instance, the company has just announced a new board chairman who was implicated in some fraud cases in the past. It doesn’t matter how well the stocks have performed in the last 365 days, or the chairman’s competence, the stock prices are most likely to slump due to loss of investor confidence.  

There was a recent case where the CEO of an internet service provider company was alleged to have been involved in sexual harassment, and was eventually pressured by shareholders to resign. The pressure came not necessarily because they thought he was guilty, but because of the implications on the company.  

You have to probe to discover the real qualities.  

 

The most expensive stocks are not necessarily the best. 

If you ever heard a stock described as under-priced or over-valued, then you should understand that the price you pay is not necessarily suggestive of the value.  

Some great stocks, with good potentials, high liquidity, good company profile and adherence to corporate governance ethics, are not as expensive as they should be. While some other stocks are ridiculously overpriced, even when they do not have as much promise. Some of these overpriced stocks could still be basking in past glory or just positive media hype.  

This explains why investors must conduct due diligence before putting in their hard-earned money. Sometimes the media hype around a company’s stock might not be giving you all the information you need to make a decision, so you necessarily have to go the extra mile.  

Subscribe to newsletters from financial news websites if you need to, take courses if you have to, but ensure to learn all you can.  

Remember price is what you pay for the stock, but value is what it is really worth, and there is no law stating that one must justify the other.  

READ MORE: Global stocks records astronomical gains in Q2 2020

When you get the wrong stocks, you get stuck! 

You know that feeling when you are sure that you have made the wrong choice, but also know that there is no way out? That’s the feeling you get when you marry the wrong partner, as my friend said. And that’s the same feeling you get when you get the wrong stocks.  

You simply get stuck.  

No returns. No dividends. Probably, no way to sell either because no one else is interested in buying from you. And if you do succeed in selling off at this point, you would most likely be doing so at a loss.  

If you study trends in the stock market, you will see some dormant stocks that have remained stagnant for long periods of time. No rise in share price, no fall in share price, and no share is being traded either.  

READ ALSO: Best time to make money trading BTCs

It is not a nice position to be in, and that is why you want to be sure of the company, its management, and board members who take the decisions before you decide to buy or not, even more so when you are a long-term investor.  

And even then, with the wrong stocks, you could suddenly find that your proposed short term investment of 6 months will run into years because you keep waiting for things to pick up before you sell.  

Patricia
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Investment Tips

Where to invest using PE, PEG

Investors should always look at the sector P.E. and compare that with individual stock P.E.

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Uncertainty strengthened as foreign portfolio investors pull out funds, chess board

Assuming, you the investor is interested in buying shares in the banking space, you have about 100,000 to invest and you want to buy the best stock that will give you the greatest return at the lowest price. You have two banks in your investment universe; you prefer Bank A and Bank Z. Bank A sells each share for N10 and Bank Z sell each for N5

Table 1.

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Share Market Price N:K
Bank A 10.00
Bank Z 5:00

 

Which would you buy? Well that easy, I would buy Bank A why? because it is cheaper. With N100,000 I can buy more shares of Bank A than Bank Z.

Hold on, not so fast.

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The market price of any stock relates to the expected future earnings of that stock. For instance, Bank A’s share price of N10 means the Present Value of the sum of expected earnings that will accrue to Bank A over the life of earnings is N10. Hence you cannot simply compare the price of Bank A to the price of Bank Z, you must compare Earnings of both banks to determine which is “cheaper”.

READ MORE: Access Bank Plc reports profit of N40.9 billion for Q1 2020

So, to compare earnings, we use a ratio called the Price to Earnings Ratio (P.E.). Earning here is the earnings per share, which means we divide total earning by issued shares. Again, we assume a total of 1m shares issued by both banks. To calculate PE, first get earnings per share, so if bank A posted earnings of 1,000,000, and we have issued shares of 100,000 then Earnings per Share is (1,000,000/100,000) or 10. The P.E. for Bank A would be (10/10) or 1.  A P.E. of 1 means the share price is 1 times the earnings of Bank A, very good. (lower P.E. is preferred). Let’s also assume Bank Z has a P.E of 0.5

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Now if we look at table 2 which now compares prices to earnings, we can see the PE of Bank Z is lower than the PE of Bank A. This means Bank at price of 10 is trading at 1 times its earnings when compared to Bank Z which is trading at o,5 its earning, thus we can say that Bank Z is “cheaper” than Bank A because we are buying at a lower multiple of earnings

Table 2.

Share Market Price N:K P.E. Ratio
Bank A 10 1
Bank Z 5 0.5

 

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READ MORE: Nigerian Stock market records sixth consecutive losses, investors lose N15.55 billion

We can also say that if a company has a high price relative to her earnings, then that company is a Growth Stock.  If, however the price relative to the earnings is lower, then the stock is a Value stock. A high growth sector like IT or biotech will have a faster growth and relatively higher PE ratio than a company in the utility sector with predictable steady earnings growth. Investors should always look at the sector P.E. and compare that with individual stock P.E.

P.E. is known as a trailing ratio because it is based on the past. Company can give forward guidance on earnings and that is used to create a Forward PE ratio. What if we wanted to compare both banks but this time instead of looking at past earning, we want to investigate the future and ask which bank we should buy using expected earnings as our main guide. To do this, we have to input expected earnings into the mix

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Perform advanced finasncial calculations on Nairamterics

Let us assume Bank A is buying a smaller bank, and that will give her more branches, leading to higher growth in the future. Let’s say this will; lead to a 20% growth in earning year by year. Bank Z is not as aggressive and earning will increase, only 10% does this change the current recommendation?

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It does and it introduces us to another ratio called the Price to Earnings Growth Ratio (PEG). The PEG is the P.E. of the Stock of the company divided by the growth rate of its earnings. We have already calculated the P.E. Ratio, so the PEG for Bank A is (1/20) or .05. This is an exceptionally good measure indicating the stock is undervalued. A PEG less than 1 generally means undervalued, more than 1 means overvalue

Patricia
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