Ojijo Nine Principles of Investing

Ojijo’s Nine Principles of Investing(Extracted from INVEST: OJIJO’S GUIDE TO FINANCIAL INSTRUMENTS

AND ALTERNATIVE INVESTMNT VEHICLES)$ Principle 1: Financial Goal Setting!

$ What Is My Financial goal?

A financial goal is a target I want to achieve. It is the ‘what Iwant to do or be’. My financial goal is the place I want to go to;the life I want to live; the career I want to practice; themoney I want to earn; the health I want to have; and theadventure I want to experience. ‘It is not enough to do my best; me mustKNOW what to do, and then do my best.’ said W. Edwards Deming,American statistician, professor, author, lecturer, andconsultant. Today, I will define and describe my financialgoals.

$ Financial Goals To Be Smart!

My financial goal must be smart.

A SMART financial goal is one that is Specific, Measurable, Actionorientated, Realistic and Time stamped.

Specific – my objectives need to be specific, what exactly do mehope to achieve and why? Being rich for example is not a smartfinancial goal because it is not specific enough. I must knowby how much: 1 million dollars? 200,000 dollars? Paul Nitzewrote, ‘One of the most dangerous forms of human error is forgetting what oneis trying to achieve.’ People with clear financial goals, accomplishfar more in a shorter period of time than people without.

Measurable – My objectives need to be measurable. I need a way ofmeasuring my progress to see whether I am target. This willallow me to tweak my action plan if needed, to get the desiredresults. When writing my financial goals, I will createbenchmarks or milestones that I can use to measure my progressand know whether I am on track, off-track or not moving atall: stagnating. I will set financial goals and posts, so thatwhen I move closer to it, I know, and when I move away from

it, I will also know. With this, nobody can stop me, nobodycan slow me down, and nobody can wear me out.

Action orientated – I need an action plan. How am I going to achievewhat I want? What are the necessary steps? What are my daily,weekly and monthly tasks? Financial goals + Actions =Results. I need to make a commitment towards implementing myaction plan. My actions will ultimately determine my level ofsuccess. Steve Chandler said, ‘a financial goal without an action plan isa day financial dream.’ I will ask myself, ‘What can I do today to get onestep, however small, closer to achieving my financial goals?’ I will then takedaily action towards my financial goals and financial dreams.Mike Murdock was right, ‘my future is hidden in what I do daily’. I mustmake the first step to begin my journey of a thousand miles.Angelo D’Amico wrote, ‘I will accomplish my financial dream of tomorrow byacting today’. My success tomorrow will be the result of my actionstoday. My success is the sum of my past experiences. Withoutthe foundation of my yesterday, my today would be pillared onnothingness; hopeless. ‘We are what we repeatedly do. Excellence, then, isnot an act, but a habit.’ said Aristotle. I will work towards andachieve my financial goals gradually, but I must start today.The anonymous 13th century mystic must be quoted now, ‘I can onlystart the journey from where I am; and not where I am going’. In the future wewill say one of the two things, ‘I wish I had’ or ‘I am glad Idid,’ but we make that choice today’. I should make the choicetoday. NOW! Most people unfortunately just expect success tohappen, what they fail to realise is that success comes tothose who make it happen. Men of action are favoured by thegoddess of good luck. ‘Financial goals allow me to control the direction ofchange in my favor.’ Brian Tracy said. It is proven that 95% ofachieving anything in life is knowing what it is that we want.

Realistic – Is my action plan and objective achievable? If not, Ishould go back and tweak it such that it is. I should askmyself, can I possibly sell goods worth 1 million dollars intwo days? Can I possibly earn 200% return on my investment insix months? If the goal is not realistic, it is a wish, andwill frustrate me. I need to set realistic goals. Big, butrealistic.

Time stamped – I will put a date on achieving my targets andensure that I remain accountable. Napoleon Hill wrote, ‘Afinancial goal is a financial dream with a deadline’. By when do I want toearn my first 100,000 dollars? By when do I want to earn myfirst one million dollars? I must state the year, month, anddate. I must time stamp my financial goal.

$ Principle 2: Leveraging! “Leverage is the reason some people with money become rich, and others with money

do not become rich.”

-Ojijo

There’s a saying: I need money to make more money.

Every financial goal and result requires resources; from buildinga house, to investing, to starting a business, to attendingschool to get an education. After all, ‘there is no such thing assomething for nothing’, Napoleon Hill reminds us. The Egyptians wereright, ‘There grows no wheat where there is no grain.’ I to earn money, Imust use money. To use fewer resources, and still achieve myfinancial goals, I need to work smart; I need to employ theconcept of leverage. What resources am I going to need tohelp me achieve my desired outcome? The trick is to use fewerresources, and achieve more results. The trick is to worksmart. The trick is to leverage.

Leverage is the process of using less to achieve more. The rootword for leverage – lever – comes from an old French wordmeaning “to make lighter,” which is an apt description of the powerof leverage. Leverage allows people to work smarter, notharder. Even the Bible says in Proverbs, 23:4-5: ‘do not overworkto be rich.’

"Give me a lever long enough and a place to stand, and I can move the Earth."

– Archimedes

To lift a heavy object, I have a choice: use leverage or not. Ican try to lift the object directly – risking injury andcertain failure– or I can use a lever, such as a jack or along plank of wood, to transfer some of the weight, and thenlift the object that way.

Leverage is about using other people’s resources to achieve myfinancial goals; other people’s STEM (skills, time, effort &money) to achieve my financial goals; leverage is about using

less of my own, to achieve more. A smart financial goal is onethat employs leverage.

Leverage is borrowing money, which I use to make even more money.The money-making potential is always proportional to the totalamount of money involved. Whether it is borrowed or not, itdoes not matter. As a common saying goes in Kenya, ‘money has nocolour.’ Millions of people struggle financially because thepower of debt leverage is used against them. Good debt makesme rich and bad debt makes me poor. Robert Kiyosaki said, “Iretired young and rich because we were deeply in debt, deeply in debt with gooddebt, debt that made us rich and financially free.“ People without leveragework for those with leverage.

Leverage is the use of various financial instruments or borrowedcapital, such as margin trading, putting down lesser amount ofmoney, and using it to control larger amount of money, hence,earning the margin. It is used in futures, forwards, options,as well as forex trading, re-purchase agreements, futurecontracts, and most forms of commodity trading.

Leverage is making sure both my principal, as well as theinterest it earns, earn me interest. This is the “The rule of72,” also called the “doubling concept”, a mind-bogglingwealth-building concept that the world’s top investmentbrokers teach their rich clients.

The poor and middle class have a hard time getting rich becausethey try to use their own money to get rich. If I want to getrich, I need to know how to use other people’s money to getrich…not my own.

I can read about how to leveraging time, leveraging skills, or leveragingeffort in Ojijo’s 69 Ways to Make Extra Money While Keeping My Day Job!

$ Principle 3: Saving-2-Invest!How do I start investing money?  By saving! The key to investing

is savings. An effective savings strategy coupled with a smartinvesting strategy will help me to meet my financial goals. ‘ifyou cannot save money, the seeds of greatness are not in you.’ wrote W.Clement Stone.

Money should not just be saved; rather, it should be saved forinvesting. When it is just saved, it is kept, and it losesvalue due to inflation. However, when it is invested, itpurchases assets, and sells those assets, at more money,called profit, or interest, or dividend. This is why money iscalled currency; it should be in constant state of motion, notstatic. Today, out of every amount of money I earn, I willsave 10% and invest it. Saving what I earn is the first stepto acquiring assets. In his masterpiece, The Richest Man inBabylon, George Clason, the soldier, businessman and writer,advises income earners thus; ‘pay yourself first.’ To save is to paymyself. Savings are used to create more money, not to paybills. Benjamin Franklin, one of the Founding Fathers of theUnited States and a noted polymath, author, printer, satirist,political theorist, politician, scientist, inventor, civicactivist, statesman, soldier, and diplomat was right, ‘A pennysaved is a penny earned.’ This is one area where the Universal Law ofAccumulation works.

To save, I need to apply Ojijo three saving strategies. The three rules ofsaving; the three saving strategies are:1) Put away2) Put away small 3) Put away small regularly

Saving in assets: the other method of saving is to directly purchasean asset, so that the money is saved in the asset. I can readextensively about the saving strategies in Making My ChildFinancially Intelligent - Money Lessons by Age Group (from 3-13 yrs).

Further, in order to save-2-invest, I need a budget. Budgeting helps meto plan my finances. Budgeting lies at the foundation of every

financial plan. Unlike what most people might believe,budgeting is not all about restricting what I spend money onand cutting out all the fun in my life.. Budgeting isunderstanding how much money I have, where it goes, and thenplanning how to best allocate the money. It does not matter ifI am living paycheck to paycheck or earning six-figures ayear, I need to know where my money is going if I want to havea handle on my finances. I will remember, ‘…money arrives like atortoise, BUT departs like a hare!’

To create a budget, I will use The Ojijo 10% Budget Plan. The Ojijo 10%Budget Plan requires that I divide my revenue into TEN equal andseparate areas, which all get 10% of the revenue allocation.The equality is premised on the fact that all parts of mydaily living are equally important.

The Ojijo 10% Budget plan is as below:

1. Giving to help the needy, whether directly or indirectly;as tithe or charity; or through the church, mosque,temple or Red Cross, etc.;

2. Rent & Utilities, including security & gardeners, mortgage,home insurance, lease, etc;

3. Saving-2-Invest in various assets, which will also includeretirement plan payments as (old age) insurance;

4. Entertainment, including vacations, gifts, club membershipfees, hobbies, etc;

5. Education, both personal and for children, includingseminars, talent development programs and educationinsurance plan, etc;

6. Food & Drinks, excluding those taken as entertainment, e.g,alcohol, etc;

7. Transport & Communication, including fuel, repair andinsurance;

8. Clothes & Personal Hygiene, including leg wear, sprays,jewellery and bathing items, etc;

9. Household & House Maintenance, including furniture &fixtures; kitchen appliances; and house help expenses, aswell as property insurance;

10. Emergency & Insurance Fund. This covers my emergencies,including health insurance and life insurance premiumssince, since disease can and will strike at anytime; and death,however certain, is always an emergency.

The rule of thumb is that any excess money that remains from anyof the categories will be added to category 3 and invested tomake me financially independent.

I can read extensively about budgeting in Making My Child FinanciallyIntelligent - Money Lessons by Age Group (from 3-13 yrs).

$ Principle 4: Long Term Investing!

Many people want to get rich, or invest in the investments therich invest in, but most are not willing to invest the time.Almost anyone can easily become a millionaire if they simplyfollows a long-term plan. But again, most people are notwilling to invest the time, they want to get rich NOW. Insteadthey say things like ‘investing is risky’ or ‘it takes money to make money’or ‘I don’t have the time to learn to invest. I’m too busy working and I have bills topay,’” Robert Kiyosaki says,

“Their ideas about money and investing cause their money problems.”

All they have to do is change a few words, a few ideas, and theirfinancial world will change like magic. But most people aretoo busy working and they do not have the time. ‘Always invest in thelong-term’, Warren Buffet advises. I need to invest long term. Ishould not be influenced by short-term fluctuations. These areinevitable in all economies as well as businesses experiencethe boom and bust cycle. I should not try to time the market.I need to get in and stay in. I should review my planperiodically, and whenever my needs or circumstances change.If I am not confident that my plan makes sense, I will talk toan investment advisor or someone I trust. A long-term viewhelps me to safely invest in 'riskier' investments, such asstocks, which the market rewards in general. This requirespatience and discipline, but it increases returns. Thisapproach reduces my choices to two: stocks and stock mutualfunds. In the long run, they are the winners. The additionalrisk is worth it due to the power of compounding. 10% a yearfor 20 years is 570%, but 7% a year for 20 years is only 280%.I should not procrastinate. Research shows that since 1960’s,five year and above investment in the stock market alwaysbrings positive return on investment. Warren Buffett advisesthus: ‘The rich invest in time, the poor invest in money.’ Most investors lackcontrol or are out of control. rich dad used,

“There is risk driving a car. But driving the car with your hands off the steering wheel isreally risky.” He then said, “When it comes to investing, most people are driving withtheir hands off the steering wheel.”

If I didn’t have a plan, a little discipline, and somedetermination, the other investor controls would not meanmuch.

I should begin now because an early start can make all thedifference. An early start provides a long time horizon forcompounding to show its true benefit for the investor. Foraverage people, investing is not so much a helpful tool as theonly way they can retire and maintain their present lifestyle.By investing long term, I am planning ahead. By planning aheadI can ensure financial stability during my retirement. ‘It neverwas my thinking that made the big money for me. It was always my sitting. Mysitting tight!’ said Edwin Lefevre. This blunt warning is treated bymany financial advisers like the Holy Bible. Once I arrange myassets into my ideal allocation, I should not tinker. WarrenBuffett again advises me, ‘I never attempt to make money on the stockmarket. I buy on assumption they could close the market the next day and not re-open it for five years.’

I will rebalance once a year to keep my mix on track, butotherwise, I will listen to Livermore and sit tight. HenryRoss Perot, the American billionaire noted, ‘Most people give up justwhen they are about to achieve success. They quit on one yard line. They give up theat last minute of the game one foot from a winning touch down.’ I willremember that even if the market tanks it always recovers forlong term investors, and when it is low I will snatch up a lotof shares at bargain prices. As long as I am dollar-costaveraging I will always be buying shares at a cheaper price.

The market can remain irrational longer than I can remainsolvent. Bubbles occur. However, investors should neverattempt to short them because, while bubbles eventually burst,they can grow larger and last longer than investor resources.This requires patience and discipline, but it increasesreturns. The additional risk is worth it due to the power of

compounding. To invest long term, I should not procrastinate.I should begin now because an early start makes all thedifference. An early start provides a long time horizon forcompounding to show its true benefit for the investor.

Further, I should invest long term since the liquidation value (ifI said, ' give me my money back'), I will often get less than myoriginal capital contributions during the first two years.That is to say, investing in the stock market is a long-termproposition, and I may only see my contribution increase invalue after the second year or so of investing.

$ Principle 5: Portfolio Diversification!

“Only a fool tests the water’s depth with both feet. “ (Ghanaian Proverb)

Portfolio diversification is the golden rule of successful investment: This simplestrategy is overlooked by 85% of investors. Diversification isa fundamental aspect of financial planning.  In a nutshell, itis the old adage to not put all my eggs in one basket.  If I have allmy eggs in one basket and something happens to the basket thenI am in big trouble.  But instead, let me say I keep some ofmy eggs in the refrigerator.  Then if something happens to theeggs in the basket I still have the ones in the refrigerator.The practice of diversification says that I should have alittle in each of these to diversify myself against risk ofthe stock market and whatever else might happen in life. 

There are two main methods of diversifying ones portfolio:

$ THE AGE METHOD: One of the most popular formulas designed to provide astage of life allocation - the age method - is to subtract your age from 100 todetermine my share percentage, put 10% in cash and the remainder in bonds.

$ TIME HORIZON METHOD: The next method that can be used is the resource /financial goal method. Here I would need to determine my time horizon. Thelonger the period (time) the greater the share allocation. Money that is needed inthe short term should not be invested into shares

I will diversify - by company, by industry, by company size and bygeography. In stocks and bonds, there is safety in numbers. Nomatter how careful I am, I can neither predict nor control thefuture. So I must diversify. ‘In stocks and bonds, as in much else, thereis safety in numbers.’ If I own the right number of stocks, bonds andfunds and they are allocated across several categories,industries and geographies, I can substantially lower the riskof losses to our portfolio and increase returns at the sametime. If I diversify properly; I can lower risk AND improvereturns at the same time, making this a no-brainer.Diversification is the process of finding the investing sweetspot where I can optimize risk vs. return.

Woody Allen stated the general idea when he said: “The advantage ofbeing bi-sexual is that it doubles your chances for a date on Saturday night.”

Diversification is about mixing: Another critical piece is thediversification mix. I want to invest in a wide variety ofindustries, categories and geographies to ensure that when onespecific area goes south, it does not tank my whole portfolio.My portfolio should be spread across a wide variety ofcategories and geographies, most of which will not correlateat all with anything going on in telecom, some may even beinversely correlated (meaning they do well when telecoms dopoorly). To diversity, I need a portfolio.

PORTFOLIO: A combination of different investment assets mixed andmatched for the purpose of achieving an investor's financial goal(s).

For example, if I own a telecom and suddenly the industry is getting bad press due toinvasion of privacy lawsuits, the rest of our portfolio can cover the losses of thatstock. Why? If we're diversified, that is probably our only telecom investments, therest are in unrelated industries and will not be directly affected by these lawsuits.

Diversification reduces risk: Diversification is important. If I spread myinvestments across various types of assets and markets, I willreduce the risk of catastrophic financial losses. Diversifyinginvestments in a portfolio helps to manage risk. The safest port ina sea of uncertainty is diversification. As most successful investors willtell me, diversification is king. A diversified portfolio not onlyreduces unwanted risk, but also contributes to a winningportfolio. And having a well-diversified portfolio does notnecessarily mean just buying more than one stock; branchingout into other areas of investment could be a viablealternative.

The strategy to get rich is entirely different than the strategy to stay rich. One gets richthrough inheritance or by taking risk. One stays rich by minimizing risk, diversifyingand not spending too much.

Items that are considered a part of my portfolio can range fromreal items such as art and real estate, to equities, fixed-income instruments and their cash and equivalents. There isnot just one strategy that can be used to invest successfully.Ideally an investment portfolio should have both equity anddebt instruments. Using this guideline I can allocate my moneyas best fits my personal situation. This strategy does noteven rely on my ability to pick stocks. It relies on theprinciple of diversification. I should divide my money betweenthese types of investments.

$ Principle 6: Dollar Cost Averaging!

Dollar cost averaging is buying at intervals: Dollar cost averaging is atechnique by which an investor divides the given investmentover a period of time and invests that amount on a regularbasis as opposed to buying in all at once.  When I buy the samestock or mutual fund at regular intervals and with a fixed amount, I am said to beusing the dollar cost averaging method.

If the market price of the selected stock or mutual funddeclines, the investor will buy a greater number of shares. Onthe other hand, when the market price of the selected stock ormutual fund increases, the investor will buy lesser number ofshares.

Dollar cost averaging reduces risk of price fluctuations: By putting in, say,$100 each month (rather than a large amount once a year), Isometimes buy when the prices of the units of the fund arehigher, and sometimes when prices are lower. In the end, thepurchase prices average out. I can hence reduce some of therisk that poor timing and potentially adverse pricefluctuations will have on my investment decisions. Just aboutany fund company or bank will let me invest like this with anautomatic payment plan.

However, dollar cost averaging will not protect me in a steadilydeclining market. Further, if I discontinue with a dollar costaveraging plan, I will lose money when the market value isless than cost of the shares.

Month DollarsInvested

Price per share No. of shares purchased

January 100 12.76 7.84

February 100 13.25 7.55

March 100 15.25 6.56

April 100 18.76 5.33

May 100 20.26 4.94

June 100 18.85 5.31

July 100 15.62 6.40

August 100 17.85 5.60

September 100 16.62 6.02

October 100 13.26 7.54

November 100 14.5 6.90

December 100 16.76 5.97

Total 1,200 193.74 75.94

Average price per share = 193.74/12 = $ 16.15

Average cost per share  = 1,200/75.94 = $ 15.80

Dollar cost averaging encourages automatic savings: The best thing aboutdollar cost averaging is that it gets me into the habit ofsaving every single month. Dollar cost averaging permitssystematic contributions to an investment portfolioperiodically, hence encouraging savings Dollar-averaging(continuing to invest the same amount of money every month)really works.

This investing strategy will, over a period of time, result inthe investor buying the selected stock or mutual fund at anaverage cost per share that will be less than the averageprice per share.

For example, assuming that a person invests $100 per month for 12 monthsin a Mutual Fund; as can be seen from the below table, the average costper share is lower than the average price per share.

$ Principle 7: Risk Tolerance! “risk is the other side of investing”

-Ojijo

Risk is a necessary element of life.  There is always the chancethat something will not work out for me and this chance iscalled risk.   There is a risk in everything I choose to do inlife including my financial life.  The broad range ofinvestment opportunities represents varied levels of risks andrewards. History unequivocally supports this ‘no free lunch’principle. Stocks (high risk) have paid more than government bonds(medium risk), which in turn have beaten low-risk Treasurybills. Among many, many other things, this law suggests thatto earn returns high enough to build true wealth, I have toput some of my money in risky assets like stocks-the onlyinvestment to handily beat inflation over time. As Rich Dadsaid, “What good is making a lot of money if you wind up losing it all?”

The greater the risk I take, the greater the reward I willreceive.  This applies to investments but also to lifedecisions.  In the financial world this is illustrated when Ichoose to invest in a stock over a safer investment.  Theextra risk I take is rewarded in terms of the stocks growth. In our personal world this is illustrated in a decision toattend college.  Attending college is essentially a case ofone assuming a risk.  I am foregoing years of income for thechance that the increased education will pay off for me inmore income in the long run.  This is actually a pretty safeinvestment that usually works. Bill Gates was right, ‘To win big,you sometimes have to take big risks.’

If I want to invest with very low risk and high returns, I haveto pay the price. And the price involves study, lots of study.I need to study the basics of business. So to be a richinvestor, “I have to be a good business owner, or know a business owner.”

$ Types of Risk

Depending on the nature of the investment, the type of'investment' risk will vary. The risk can be caused by market

changes, interest rates fluctuation, management imprudence,liquidity rates, industry practices, political issues, etc.

$ Risk Reduction Strategies

Since there is imminent risk in entrepreneurship, everyentrepreneur should take risk reduction measures. I can dothis by applying various strategies:

Experimenting: The first strategy is to experiment. This involvestaking action through a series of low cost events and projectsbefore committing a great deal of resources (time, energy,skills and money).

Risk Sharing: Risk sharing by partnership with individuals orcorporations that have complementary skills will increase thechance of success while reducing the risk in terms of time,skills, money and energy that is required.

Risk Should Be Proportional To Available Disposable Income: The golden rulesurrounding all investing is: I should not spend more than I can affordto lose. This is the absolute truth. As a general rule in risktaking, I should not take more risk than ability, willingness or need dictates. Ishould take risk with money I can afford to lose.

Risk Should Depend On My Investment Objectives: The two main investmentobjectives are income generation and capital appreciation. Capitalappreciation will require high risk, high return investmentslike equities, while income generation require low risk, fixedsecurities, like bonds.

Risk Should Be Based On My Financial Position: As multi-millionaire, in aneffort to increase my profit for the year; I may have noproblem putting down $100,000 in a speculative real estateinvestment.

Risk Should Be Based On My Age: A 75-year-old widow living off of herretirement portfolio needs income from her investments tosurvive, she cannot risk losing her investment, and takes apassive investment strategy. A 35 year old young executive, on

the other hand, has time on his or her side, and hence, takesan aggressive investment strategy.

Diversification Mitigates Risk: Whatever my personality type, putting myeggs in different baskets protects me from a failure in oneindustry sector, or one company.

Knowledge Mitigates Risk: The more extensive my knowledge of what hasbeen done, the greater will be my power of knowing what (not)to do. ‘As a general rule, the most successful man in life is the man who has thebest information.’ said Benjamin Disraeli. I should build myknowledge base to help me in achieving financial independence.Whether it takes a week, a month or a year to becomethoroughly knowledgeable, it does not matter. I should startlearning immediately, today. Investing is a big bet on anunknowable future. I should accept I need to learn, and thenlearn. This will reduce the risk of venturing into thisunknowable future. Think about how much information I have!Too little increases risk. Warren Buffett said, ‘Risk comes fromnot knowing what you are doing.’

$ Principle 8: Knowledge-Based Investing!To be a great investor, I need have a great financial IQ.

Financial literacy is one of the most important investor basics,especially if I want to be a safe investor, an insideinvestor, and a rich investor. Kiyosaki said,

“Anyone who is not financially literate cannot see into an investment.”

Improving my financial literacy ultimately reduces my risk andimproves my investment returns.

I don’t need to be an expert in order to achieve satisfactoryinvestment returns. But I must recognize my limitations. It’svital, however, that I recognize the perimeter of my “circleof competence” and stay well inside of it. I will focus onthe future productivity of the asset I am considering. No onehas the ability to evaluate every investment possibility, butI need to forecast for five years to ten years, at the least.If I lack the ability to estimate future earnings, I shouldmove on to other prospects. If I don’t feel comfortable makinga rough estimate of the asset’s future earnings, I will forgetit and move on.

I need to be an informed investor. Investing is the key tobuilding wealth, but investing in and of itself is not enough.If I have to invest, I need to invest wisely! I do not needto be a financial expert to invest, but I do need to learnsome basic terminology and concepts so that I am betterequipped to make informed decisions. This is what this guideis all about. Investment is not speculation. Investment is informedspeculation. My financial goal is to be informed enough tounderstand and analyze what I hear. Then I can decide whatfits with my investing personality. When asked how he managedto become a rich investor, Warren Buffet said, ‘we read hundredsand hundreds of reports every year.’

Investors are willing to pay for knowledge. They read books,journals and magazines ranging from investing to personaldevelopment. They attend seminars to improve themselves. Theyare voracious. Successful investors know that their cup ofknowledge must never be full so they always keep their mindsopen; ever ready to learn. Robert Kiyosaki reminds investorsthat investment is all about being an insider. To be aninsider today, I will be informed. As Kiyosaki says, “knowledgeis the new money”.

I make the most money as an investor by being financiallyliterate as well as knowing internal strengths and weaknessesof the investment. I find the best investment opportunities fromunderstanding accounting, the tax code, business law, and corporate law. Themore I read financial statements, annual reports, andprospectuses, the more my financial intelligence, or financialvision, increases. Over time I will begin to see things thatthe average investor never sees. It is in these invisiblerealms where the real investors shop for the biggestinvestment bargains. As Warren Buffet says, “the income statementand balance sheet the magic carpet of investing.” Learning to readfinancial statements is a tedious process, especially when Ifirst begin to learn. The good news is that it gets easier andfaster as I practice. But not only does it get easier, but Ican also review many more investment opportunities almostautomatically without thinking, just like riding a bike, ordriving a car.

The reason most people suffer financially is because theypurchase liabilities and list them under assets. If I want tobe rich for generations, I must know the difference between anasset and a liability. I must know the difference between somethingof value and something that reduces value. I will alwaysremember that my expense is someone else’s income, and myliabilities are someone else’s asset. When I am out of controlof my cash flow, I make the people who are in control of theircash flow rich.

I need to understand the financial ratios, mainly the return onequity, return on assets, and return on capital, which allanalyse how the transforms capital into profit for investors.The other ratios are debt to equity ratios, or leverageratios, which indicate what percentage of the company isfunded by debt, and hence, how much more debt the company canabsorb before it becomes fully leveraged.

Warren Buffett never invests in businesses he cannot understandor that are outside his “Circle of Competence.” All investorscan, over time, obtain and intensify their “Circle ofCompetence” in an industry where they are professionallyinvolved or in some sector of business they enjoy researching.

Buffett’s logic is compelling: “If you own a company (either fully or someof its shares) in an industry you do not understand, it is impossible to accuratelyinterpret developments and therefore impossible to make wise decisions.”

There is a great investing saying thus, ‘Invest in things you know.’Peter Lynch said it best when he said, ‘Never invest in an idea Icannot illustrate with a crayon.’

$ Principle 9: Re-Investing & Compounding!

Reinvesting means plaughing back what I earn as profit intopurchasing more assets, hence, investing it. When I am investing, Ishould not be a hungry investor. If I make a profit, at least 50%should be ploughed back in investments. Compounding is themost important principle in saving and investing. It has beencalled the eighth wonder of the world. It is the key conceptof any saving and investing plan. AlbertEinstein called compound interest ‘the greatest mathematical discoveryof all time’. This is true partly because, unlike the trigonometryor calculus I studied back in high school, compounding can beapplied to everyday life, and in finance, it applies toamplify the growth of my working money. Whereas investing maximizesmy earning potential, compounding maximizes the earning potential of myinvestments.

Compounding makes money make more money: The wonder of compounding(‘compound interest’) transforms my working money into astate-of-the-art, highly powerful income-generating tool.Compounding is the process of generating earnings on anasset's reinvested earnings. To work, it requires two things:  re-investment of earnings and time.

The more time I give my investments, the more I am able toaccelerate the income potential of my original investment,which takes the pressure off of me. Compounding is premised onthe doctrine of the Time Value of Money. (TVM). Time Value ofMoney (TVM) is the idea that money available at the present time isworth more than the same amount in the future due to itspotential earning capacity. This core principle of financeholds, provided money can earn interest, any amount of moneyis worth more the sooner it is received.  The time value ofmoney demonstrates, all things being equal, it is better tohave money now rather than later. I need to start investmentnow, today. I need to start investing now, today. By giving myinvestment more time to grow, I earn myself more money.Investments start to grow slowly and then accelerate. The

invested money accumulates interest, and the accumulatedinterest is itself accruing more interest. Everyone knows thatmoney deposited in a savings account will earninterest. Because of this universal fact, I would prefer toreceive money today rather than the same amount in the future.The earlier I put money to work, the longer it works for themembers, and the more wealth is generated. It makes a lot ofsense. Wealth is generated via production. The longer my money works ingood companies, the more time it has to produce furtherprofit; profit which I also get to share.

Reinvesting earnings allows me to take advantage of compounding.I must keep hands off the principal and earned interest. Compounding isrealized by reinvesting the earned income or interest. Reinvesting isthe investment of both principal and income from principal rather than distributingit as dividends or profits. Reinvestment of resources is a usefulstrategy that all entrepreneurs regularly employ. As long as Ido not need the income (from dividend payouts), It isgenerally a good idea to reinvest. Reinvestment dovetails withthe investing maxim of ‘dollar cost averaging,’ which holds thatinvestors do well to consistently invest small amounts ofmoney. The return I receive on an investment is interest. IfI invest $20,000 and it returns a modest 10% a year then Iwill have earned $2,000 in interest. Compounding interest isthe escalating effect of interest. As an example, if my$20,000 investment was returning 10% per year after 10 years Iwould expect to receive $20,000 in interest. Actually it ismuch more than that. Compounding interest ensures the amount I earn ismore. After Year 1 I receive $2,000 which makes my investment$22,000. For Year 2, 10% of $22,000 is $2,200. This is becauseI reinvested that $2,000; it works together with the originalinvestment. This means the amount of interest I receive inyear 2 is greater than year 1. This interest I am earning iscompounding. Every year, my investment compounds more andmore. After 5 years my investment of $20,000 has gone up to$32,210. That is interest of $12,210 not $10,000 as I firstthought. This little bit extra may seem like peanuts, but Idid not have to lift a finger to earn that $2,210. Moreimportantly, this $2,210 also starts to earn interest. At the

end of 10 years my investment is worth $51,875. I havereturned $31,875 and not $20,000.

Dividend Reinvestment: When I am paid a dividend, I typically canchoose to receive it in cash or reinvest it and purchaseadditional stock. Dividend reinvestment is a systematic methodof accumulating shares of a stock that pays a dividend. Manyinvestors use dividend reinvestment as part of a long-termbuy-and-hold investment program. This will happen even as Isend voluntary contributions to purchase additional shares.Further, putting dividend reinvestment stocks in a retirementaccount can shelter the dividends from current tax liability.If I choose to reinvest our dividends, in effect, we're takingthe dividend payment in stock instead of cash. Reinvestingdividend income is an important part of the overall return onour investment as a club. It is similar to compoundinginterest, with the principal of our investment constantlygrowing and theoretically paying higher dividends eachquarter. The process takes time, but reinvesting our dividendscan increase our total return in the long run. The cool thingis that I can put all of my profit back to work, andeffectively have more money generating more profit. Thisprocess can keep iterating so long as I do not withdraw mymoney.

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The Author, Ojijo, is a public speaker and consultant in

financial literacy, collective investment schemes (investment

clubs and saccos), and business financial projections; lawyer and

guest lecturer in financial services law, law firm management,

and ICT law; author of 36 books; Rotarian; Inua Kijana

Fellow; PoetPianist; and

owner, www.luopedia.com, www.lawpronto.com,www.allpublicspeakers.

com, www.ajuoga.com, www.bankitgroup.com,www.parara.com and www.a

chibela.com.

Email: [email protected] Mobile:+256776100059