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Flipping a Stock



Dear Speculators,

When we buy shares in the stock market, we become part owners of a company. A lot of people forget this fact when trading and only look to flip the stock immediately the price goes up. Warren Buffet often says when he buy shares of a company, he is not looking at how it's going to perform today, next week or a month from now, in most cases he plans to own these stocks for life. The intelligent investor does not buy low and sell high, he buys undervalued companies and sells over valued companies. Equity investment is more risky than debt investment or cash holding. In the long run, equity always out performs other forms of investment except during times of an economic depression. Equity investment provides returns for shareholders in two forms. Dividend and capital gain, which is an increase in the value of the share. There are two types of capital gain or loss in the equity market: earnings driven growth and market driven growth. The best type of growth is the earnings driven growth. The share value increases as a result of an increase in the net earnings of a company with little or no dilution of shares in order to achieve the increase in earnings per share. Market driven growth occurs when certain market activities push the prices of shares up with any fundamental backing. This sort of growth makes shares over valued and we should sell our investments immediately we notice such an occurrence.

The uninformed or noisy investors tend to apply technical analysis alone in their search to investment opportunities. You can only play with fire for so long before getting burned. A combination of both technical analysis and fundamental analysis is crucial to select the right stocks, with the latter being the most important. When we buy undervalued companies and enjoy earnings driven growth, we are not to get out of such investments but enjoy the ride. This growth increases the net worth of shareholders. Although market driven growth also increases shareholders wealth, such growth is temporary and prone to a massive price correction. Sometimes we are told to bet against the market if we want to make huge returns in equity investment. My advice is to think for yourself and not follow the crowd when investing.

The stock market like the economy is prone to huge cyclical fluctuations. These fluctuations usually precede the economic cycle. Investors try to predict beforehand how the economy will perform and factor in prices in their investment before their forecast actually happens. If expectations are not met, this can lead to a correction in the price of such investments. On the average the market a cycle is 10 years with 5-7 up years and 2-3 down years. We know the market is going to be up sometimes and down sometimes but knowing the exact time is anybody's guess. Buying at the top or near the top of a market cycle and selling at the bottom is the reason for major losses in the stock market. It is therefore imperative to understand why prices are up or down in any investment before placing a bet and what point we are in the cycle. Legendary investor George Soros applies smart investment tactics like ripple effect theory to know where to invest after information of major events or occurrences. If you see a dark cloud forming, it is easier to predict a rain and if you see the sun rising, it is easier to predict sunshine. It is necessary for investors to think in this manner, especially short term investors.
Benjamin Graham said in the short term, the market is a voting machine, but in the long term, the market is a weighting machine. This means that in the short term, the market is volatile but in the long term, the market always goes up. Buy only great companies and never over pay for any investment. Never get too attached to any investment and sell when it is overvalued and reenter when it is back to fair value. Buy businesses you understand, patronize their products and advertise for the company after all you are now a part owner of the establishment. Its success is your success and its failures are also your failures.

The patient dog eats the fastest bone. If you give your investments time to grow, you will surely reap high benefits. The stock market is not a lottery machine and investors should stop thinking they can make billions overnight. Consistency is key in the stock market. If you keep winning, the sky is the limit.

Signed:
Emeka Ucheaga,
Managing Partner,
Emeka Ucheaga Advisory

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