Understanding Technical Investing as it Relates to the Nigerian Stock Exchange

Robert Kiyosaki, in his best-selling book; Guide to Investing, wrote some important things on technical investing in his attempt to define a “Qualified Investor”. Most of the lessons in that chapter happen to coincide with the market situation in the Nigerian Stock Exchange today. The following excerpts from that book, not only define technical investing in its true sense, but also give sound advice on what to do in circumstances like we have today.

Definition of Technical Investing

Technical investing: Rich Dad said, “A well-trained technical investor invests on the emotions of the market and invests with insurance from catastrophic loss. The most important consideration for selecting a good stock for investment is based on the supply of and demand for the company’s stock. The technical investor studies the patterns of the sales price of the company’s stock. Will the supply of the shares of stock being offered for sale be sufficient based on the expected demand for those shares?

Methods of a Technical Investor

The technical investor tends to buy on price and market sentiment...just like a shopper shops for sales and discounted items…

The technical investor studies the pattern of the history of the company’s stock price. A true technical investor is not concerned with the internal operations of a company as a fundamental investor would be. The primary indicators the technical investor is concerned with are the mood of the market and the price of the stock.

Reasons for Stock Price Fluctuation

One of the reasons so many people think the subject of investing is risky is because most people are technically operating as “technical investors” but don’t know the difference between a technical investor and a fundamental investor. The reason investing seems risky from the technical side is because stock prices fluctuate with market emotions. Here are just a few examples of things that can cause fluctuations in stock prices:

One day a stock is popular and in the news, next week it isn’t, or the company manipulates supply and demand by splitting the stock, diluting the pool with additional shares being created through such things as secondary offerings, or cutting back the number of shares by buying them back; or

An institutional buyer (like a mutual fund or pension fund) buys or sells the shares of a certain company in such volume that it disturbs the market.

Segun’s note: Or, as was the case in the election year of 2003, where investors bailed out of stocks in an anticipation of political instability. For some uncanny reason or the other, this occurrence has been avoided in the present election year.

Why Investing is risky to the Average Investor

Investing seems risky to the average investor because they lack the basic financial education skills to be a fundamental investor and do not have adequate technical investor skills. If they are not on the board of the company changing the supply side of the shares they have no management control over the fluctuations of supply and demand of the stock’s price on the open market. They remain at the whim of the market emotions…

Since 1995, people operating strictly as fundamental investors have not done as well as investors who also consider the technical side of the market. In this market where the people who take the most risk win, people with more cautious and value oriented views lost out on this market mania. In fact, many of these risk takers frightened many technical investors as well with their high prices of stock without any value. But in a crash, it is those investors with the strong fundamental investments and technical trading skills who do well. The amateur speculators rushing into the market will be hurt in the down turn.

Segun’s note: The market mania referred to here can be likened to the present situation in the Nigerian stock market where the banking reforms and the consequent windfall has caused many people to start trading on the secondary market without adequate technical investor skills. This has resulted in a mania and is an ample opportunity that true technical investors can cash in on. Sentiments run the market so an investor who knows when to get in AND when to get out could make a killing.

Invest Wisely, Invest in Financial Education

Finally, I’ll leave you with a word of advice from Robert Kiyosaki. It is a warning to be watchful and to aim financial intelligence before aiming for profit. It is a statement of self appraisal:

Rich dad said, “The trouble with getting rich quickly without a parachute is that you fall farther and faster. Lots of easy money makes people think they are financial geniuses when in fact, they become financial fools.” Rich dad believed that both technical as well as fundamental skills were important to survive the ups and downs of the world of investing.

George Soros who is one of the most famous technical investors, made billions of dollars in a single speculation in 1992. The classic article; The Speculator: 3 lessons from ace investor George Soros by Laurel Kenner and Victor Niederhoffer, gives a rare insight into his generic investing methods.


Recommended Reading

Guide to Investing by Robert Kiyosaki

Investing Wrongly in the Nigerian Stock Market: A Worrying Trend

Rich dad said, “The trouble with getting rich
quickly without a parachute is that you fall farther and faster. Lots of easy
money makes people think they are financial geniuses when in fact, they become
financial fools.” Guide to Investing

With the Nigerian capital market now agog with activity, the general public is getting increasingly interested in investing in stocks. Many newspapers, both fledgling and established, now dedicate a significant proportion of their articles to the stock market. The media support is massive and a growing number of people are making more money than they ever thought was possible in just a few months. The Nigerian Stock Market has being bullish (having an upward trend) this year and the excitement is almost feverish. This is a good sign. But like everything that has an advantage there is always a disadvantage lurking in the corner. The idea is to weigh both sides and make a decision for or against. Unfortunately, this is presently absent in the market.

The Nigerian economy is growing (at least relative to what it was before 2005) amazingly; international debts are being paid off, foreign reserves are enjoying a near geometric growth, there has been a tremendous influx of foreign investors, a stronger naira, steady execution of huge projects e.g. Tinapa, the list goes on and on, this has reflected on the stock exchange but has also left an inconspicuous financial cancer in its wake. Lots of Nigerians are investing without any knowledge of investing at all!

Tracing back our historical calendars by three years, we encounter a different economy. We encounter a much less publicized stock exchange, several small (or tiny) banks, foreign investors with a leprous attitude to the idea of investing in Nigeria, and, probably most importantly, Nigerian people who literally had to be cajoled to invest in the stock market. Now, fast forward three years to present day, these same people with little or no idea of what the stock market is in 2004 now consider themselves financial supermen/women. Hardly a day passes without a fabulous story of fantastic gains: “I invested in Intercontinental bank plc at N6.00 now it is N27.00” or “I invested in Oceanic Bank International plc at N5.30 now it is N19.53” or “I invested in Zenith Bank plc at N11.69 now it is N42.00” the stories are endless. People do not realize that these where just cases of luck as the stock market at the time was flooded with sound businesses with sound managements at their reins so one could just close her eyes and invest in the most appealing company (an emotional judgment) and reap profits. They also do not realize that these where cases of forced fundamental investing. At the time companies where mandated to provide financial statements and provide the public with an honest view of their financial health. Most of those companies could have been given a pass mark and the present bull market would have been met with expectation and not excitement thus keeping a level head in an increasingly mad world, had these people saved some time to go through their prospectuses. As time goes on, such opportunities WILL become rarer and only financial literates will spot them and take advantage of them.

What is worrisome however, is this; with a confidence underpinned by fatter accounts, these people are now turning their interests to the secondary market, they have registered with various stock broking firms and even have CSCS accounts (Central Securities and Clearing System accounts). Their intentions are directed in one direction; to trade in stocks. They want to make quick money. They are fascinated by Fidelity bank plc going to over a hundred percent in a few weeks or Dangote Sugar Refinery plc crossing the hundred percent mark in 3weeks etc. In essence, they are engaging in Technical investing without any knowledge of it (or Fundamental investing for that matter) at all. This means that from now till an infinite time in future these people will likely lose their money in either unfavorable market conditions or outright bad deals. Actually it could occur in two ways; they either win or lose depending mainly on luck.
There is a way out though, a way that could lead to a greater occurrence of winning. And that is learning what technical investing is and its application to the stock market. So what is technical investing? The next article gives a brief introduction to whet your appetite to research the subject. Have a happy research


NB: Many of the Banks which crossed the Central Bank of Nigeria’s deadline of July 2005 to consolidate have given sizeable returns to their investors. However there are some that didn’t quite make it. I know of a man who borrowed $8000 to invest in All State Trust Bank plc public offer, the bank went under taking the borrowed funds with it and leaving the man biting his fingers in regret. But this kind of stories has been overshadowed by the success of the others

The present situation in the market actually makes endless activities available to the True Technical Investor. A Technical Investor who understands the vicissitudes of the market could make a killing from the market’s present condition, investing mainly by monitoring the market sentiments.