This document outlines Ojijo's Nine Principles of Investing, beginning with the importance of setting SMART financial goals that are specific, measurable, action-oriented, realistic, and time-bound. It discusses the principle of leveraging, which is using fewer resources to achieve more through borrowing money or using other people's resources. The third principle covered is saving-to-invest, where the key is having an effective savings strategy in order to start investing and meet financial goals. It emphasizes paying yourself first by saving a portion of income and directly purchasing assets.

1. Ojijo’s Nine Principles of Investing
(Extracted from INVEST: OJIJO’S GUIDE TO FINANCIAL INSTRUMENTS AND
ALTERNATIVE INVESTMNT VEHICLES)
ق Principle 1: Financial Goal Setting!
$ What Is My Financial goal?
A financial goal is a target I want to achieve. It is the ‘what I want 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; the money I want to earn; the health I want to have; and the adventure I
want to experience. ‘It is not enough to do my best; me must KNOW what to do, and then
do my best.’ said W. Edwards Deming, American statistician, professor, author,
lecturer, and consultant. Today, I will define and describe my financial goals.
$ Financial Goals To Be Smart!
My financial goal must be smart.
A SMART financial goal is one that is Specific, Measurable, Action orientated, Realistic and
Time stamped.
Specific – my objectives need to be specific, what exactly do me hope to achieve and
why? Being rich for example is not a smart financial goal because it is not specific
enough. I must know by how much: 1 million dollars? 200,000 dollars? Paul Nitze
wrote, ‘One of the most dangerous forms of human error is forgetting what one is trying to
achieve.’ People with clear financial goals, accomplish far more in a shorter period of
time than people without.
Measurable – My objectives need to be measurable. I need a way of measuring my
progress to see whether I am target. This will allow me to tweak my action plan if
needed, to get the desired results. When writing my financial goals, I will create
benchmarks or milestones that I can use to measure my progress and know whether
I am on track, off-track or not moving at all: stagnating. I will set financial goals and
posts, so that when I move closer to it, I know, and when I move away from it, I will
also know. With this, nobody can stop me, nobody can slow me down, and nobody
can wear me out.
Action orientated – I need an action plan. How am I going to achieve what 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 my action plan. My actions will ultimately determine my level of
success. Steve Chandler said, ‘a financial goal without an action plan is a day financial
dream.’ I will ask myself, ‘What can I do today to get one step, however small, closer to
achieving my financial goals?’ I will then take daily action towards my financial goals

2. and financial dreams. Mike Murdock was right, ‘my future is hidden in what I do daily’.
I must make the first step to begin my journey of a thousand miles. Angelo
D’Amico wrote, ‘I will accomplish my financial dream of tomorrow by acting today’. My
success tomorrow will be the result of my actions today. My success is the sum of
my past experiences. Without the foundation of my yesterday, my today would be
pillared on nothingness; hopeless. ‘We are what we repeatedly do. Excellence, then, is not
an act, but a habit.’ said Aristotle. I will work towards and achieve my financial goals
gradually, but I must start today. The anonymous 13th century mystic must be
quoted now, ‘I can only start the journey from where I am; and not where I am going’. In
the future we will say one of the two things, ‘I wish I had’ or ‘I am glad I did,’ but
we make that choice today’. I should make the choice today. NOW! Most people
unfortunately just expect success to happen, what they fail to realise is that success
comes to those who make it happen. Men of action are favoured by the goddess of
good luck. ‘Financial goals allow me to control the direction of change in my favor.’ Brian
Tracy said. It is proven that 95% of achieving anything in life is knowing what it is
that we want.
Realistic – Is my action plan and objective achievable? If not, I should go back and
tweak it such that it is. I should ask myself, can I possibly sell goods worth 1 million
dollars in two days? Can I possibly earn 200% return on my investment in six
months? If the goal is not realistic, it is a wish, and will frustrate me. I need to set
realistic goals. Big, but realistic.
Time stamped – I will put a date on achieving my targets and ensure that I remain
accountable. Napoleon Hill wrote, ‘A financial goal is a financial dream with a deadline’.
By when do I want to earn my first 100,000 dollars? By when do I want to earn my
first one million dollars? I must state the year, month, and date. I must time stamp
my financial goal.

3. ق 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 building a house, to investing,
to starting a business, to attending school to get an education. After all, ‘there is no
such thing as something for nothing’, Napoleon Hill reminds us. The Egyptians were
right, ‘There grows no wheat where there is no grain.’ I to earn money, I must use
money. To use fewer resources, and still achieve my financial goals, I need to work
smart; I need to employ the concept of leverage. What resources am I going to need
to help me achieve my desired outcome? The trick is to use fewer resources, and
achieve more results. The trick is to work smart. The trick is to leverage.
Leverage is the process of using less to achieve more. The root word for leverage – lever
– comes from an old French word meaning “to make lighter,” which is an apt
description of the power of leverage. Leverage allows people to work smarter, not
harder. Even the Bible says in Proverbs, 23:4-5: ‘do not overwork to 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. I can try to lift the object
directly – risking injury and certain failure– or I can use a lever, such as a jack or a
long plank of wood, to transfer some of the weight, and then lift the object that way.
Leverage is about using other people’s resources to achieve my financial 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 one that
employs leverage.
Leverage is borrowing money, which I use to make even more money. The money-making
potential is always proportional to the total amount of money involved.
Whether it is borrowed or not, it does not matter. As a common saying goes in
Kenya, ‘money has no colour.’ Millions of people struggle financially because the
power of debt leverage is used against them. Good debt makes me rich and bad debt
makes me poor. Robert Kiyosaki said, “I retired young and rich because we were deeply
in debt, deeply in debt with good debt, debt that made us rich and financially free.“ People
without leverage work for those with leverage.

4. Leverage is the use of various financial instruments or borrowed capital, such as margin
trading, putting down lesser amount of money, 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, future contracts, and most forms of
commodity trading.
Leverage is making sure both my principal, as well as the interest it earns, earn me
interest. This is the “The rule of 72,” also called the “doubling concept”, a mind -
boggling wealth-building concept that the world’s top investment brokers teach
their rich clients.
The poor and middle class have a hard time getting rich because they try to use their
own money to get rich. If I want to get rich, I need to know how to use other
people’s money to get rich… not my own.
I can read about how to leveraging time, leveraging skills, or leveraging effort in Ojijo’s 69
Ways to Make Extra Money While Keeping My Day Job!

5. ق 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 smart investing strategy will help me to
meet my financial goals. ‘if you 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 for investing. When it is just
saved, it is kept, and it loses value due to inflation. However, when it is invested, it
purchases assets, and sells those assets, at more money, called profit, or interest, or
dividend. This is why money is called currency; it should be in constant state of
motion, not static. Today, out of every amount of money I earn, I will save 10% and
invest it. Saving what I earn is the first step to acquiring assets. In his masterpiece,
The Richest Man in Babylon, George Clason, the soldier, businessman and writer,
advises income earners thus; ‘pay yourself first.’ To save is to pay myself. Savings are
used to create more money, not to pay bills. Benjamin Franklin, one of the Founding
Fathers of the United States and a noted polymath, author, printer, satirist, political
theorist, politician, scientist, inventor, civic activist, statesman, soldier, and diplomat
was right, ‘A penny saved is a penny earned.’ This is one area where the Universal Law
of Accumulation works.
To save, I need to apply Ojijo three saving strategies. The three rules of saving; the three
saving strategies are:
1) Put away
2) Put away small
3) Put away small regularly
Saving in assets: the other method of saving is to directly purchase an asset, so that the
money is saved in the asset. I can read extensively about the saving strategies in
Making My Child Financially Intelligent - Money Lessons by Age Group (from 3-13 yrs).
Further, in order to save-2-invest, I need a budget. Budgeting helps me to 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 on and
cutting out all the fun in my life.. Budgeting is understanding how much money I
have, where it goes, and then planning how to best allocate the money. It does not
matter if I am living paycheck to paycheck or earning six-figures a year, I need to
know where my money is going if I want to have a handle on my finances. I will
remember, ‘…money arrives like a tortoise, 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 and separate areas, which all get
10% of the revenue allocation. The equality is premised on the fact that all parts of
my daily living are equally important.

6. 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 include retirement plan
payments as (old age) insurance;
4. Entertainment, including vacations, gifts, club membership fees, hobbies, etc;
5. Education, both personal and for children, including seminars, talent
development programs and education insurance plan, etc;
6. Food & Drinks, excluding those taken as entertainment, e.g, alcohol, etc;
7. Transport & Communication, including fuel, repair and insurance;
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, as well as property insurance;
10. Emergency & Insurance Fund. This covers my emergencies, including health
insurance and life insurance premiums since, 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 any of the categories will
be added to category 3 and invested to make me financially independent.
I can read extensively about budgeting in Making My Child Financially Intelligent - Money
Lessons by Age Group (from 3-13 yrs).

7. ق Principle 4: Long Term Investing!
Many people want to get rich, or invest in the investments the rich invest in, but most
are not willing to invest the time. Almost anyone can easily become a millionaire if
they simply follows a long-term plan. But again, most people are not willing to
invest the time, they want to get rich NOW. Instead they 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 to pay,’” 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 their financial world will
change like magic. But most people are too busy working and they do not have the
time. ‘Always invest in the long-term’, Warren Buffet advises. I need to invest long
term. I should not be influenced by short-term fluctuations. These are inevitable in
all economies as well as businesses experience the boom and bust cycle. I should not
try to time the market. I need to get in and stay in. I should review my plan
periodically, and whenever my needs or circumstances change. If I am not confident
that my plan makes sense, I will talk to an investment advisor or someone I trust. A
long-term view helps me to safely invest in 'riskier' investments, such as stocks,
which the market rewards in general. This requires patience and discipline, but it
increases returns. This approach reduces my choices to two: stocks and stock mutual
funds. In the long run, they are the winners. The additional risk is worth it due to
the power of compounding. 10% a year for 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 always brings positive return on
investment. Warren Buffett advises thus: ‘The rich invest in time, the poor invest in
money.’ Most investors lack control 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 is really
risky.” He then said, “When it comes to investing, most people are driving with their hands
off the steering wheel.”
If I didn’t have a plan, a little discipline, and some determination, the other investor
controls would not mean much.
I should begin now because an early start can make all the difference. An early start
provides a long time horizon for compounding to show its true benefit for the
investor. For average people, investing is not so much a helpful tool as the only way
they can retire and maintain their present lifestyle. By investing long term, I am
planning ahead. By planning ahead I can ensure financial stability during my
retirement. ‘It never was my thinking that made the big money for me. It was always my
sitting. My sitting tight!’ said Edwin Lefevre. This blunt warning is treated by many

8. financial advisers like the Holy Bible. Once I arrange my assets into my ideal
allocation, I should not tinker. Warren Buffett again advises me, ‘I never attempt to
make money on the stock market. 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, but otherwise, I will listen to
Livermore and sit tight. Henry Ross Perot, the American billionaire noted, ‘Most
people give up just when they are about to achieve success. They quit on one yard line. They
give up the at last minute of the game one foot from a winning touch down.’ I will
remember that even if the market tanks it always recovers for long term investors,
and when it is low I will snatch up a lot of shares at bargain prices. As long as I am
dollar-cost averaging I will always be buying shares at a cheaper price.
The market can remain irrational longer than I can remain solvent. Bubbles occur.
However, investors should never attempt 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 increases returns. 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 the difference. An early start
provides a long time horizon for compounding to show its true benefit for the
investor.
Further, I should invest long term since the liquidation value (if I said, ' give me my
money back'), I will often get less than my original capital contributions during the
first two years. That is to say, investing in the stock market is a long-term
proposition, and I may only see my contribution increase in value after the second
year or so of investing.

9. ق 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 simple strategy is
overlooked by 85% of investors. Diversification is a fundamental aspect of financial
planning. In a nutshell, it is the old adage to not put all my eggs in one basket. If I
have all my eggs in one basket and something happens to the basket then I am in big
trouble. But instead, let me say I keep some of my eggs in the refrigerator. Then if
something happens to the eggs in the basket I still have the ones in the refrigerator.
The practice of diversification says that I should have a little in each of these to
diversify myself against risk of the 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 a stage of
life allocation - the age method - is to subtract your age from 100 to determine 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. The longer the
period (time) the greater the share allocation. Money that is needed in the short term
should not be invested into shares
I will diversify - by company, by industry, by company size and by geography. In stocks
and bonds, there is safety in numbers. No matter how careful I am, I can neither
predict nor control the future. So I must diversify. ‘In stocks and bonds, as in much else,
there is safety in numbers.’ If I own the right number of stocks, bonds and funds and
they are allocated across several categories, industries and geographies, I can
substantially lower the risk of losses to our portfolio and increase returns at the
same time. If I diversify properly; I can lower risk AND improve returns at the same
time, making this a no-brainer. Diversification is the process of finding the investing
sweet spot where I can optimize risk vs. return.
Woody Allen stated the general idea when he said: “The advantage of being bi-sexual is
that it doubles your chances for a date on Saturday night.”
Diversification is about mixing: Another critical piece is the diversification mix. I want to
invest in a wide variety of industries, categories and geographies to ensure that
when one specific area goes south, it does not tank my whole portfolio. My portfolio
should be spread across a wide variety of categories and geographies, most of which
will not correlate at all with anything going on in telecom, some may even be

10. inversely correlated (meaning they do well when telecoms do poorly). To diversity, I
need a portfolio.
PORTFOLIO: A combination of different investment assets mixed and matched 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 to invasion of
privacy lawsuits, the rest of our portfolio can cover the losses of that stock. Why? If we're
diversified, that is probably our only telecom investments, the rest are in unrelated industries
and will not be directly affected by these lawsuits.
Diversification reduces risk: Diversification is important. If I spread my investments
across various types of assets and markets, I will reduce the risk of catastrophi c
financial losses. Diversifying investments in a portfolio helps to manage risk. The
safest port in a sea of uncertainty is diversification. As most successful investors will tell
me, diversification is king. A diversified portfolio not only reduces unwanted risk, but
also contributes to a winning portfolio. And having a well-diversified portfolio does
not necessarily mean just buying more than one stock; branching out into other
areas of investment could be a viable alternative.
The strategy to get rich is entirely different than the strategy to stay rich. One gets rich through
inheritance or by taking risk. One stays rich by minimizing risk, diversifying and not
spending too much.
Items that are considered a part of my portfolio can range from real items such as art
and real estate, to equities, fixed-income instruments and their cash and equivalents.
There is not just one strategy that can be used to invest successfully. Ideally an
investment portfolio should have both equity and debt instruments. Using this
guideline I can allocate my money as best fits my personal situation. This strategy
does not even rely on my ability to pick stocks. It relies on the principle of
diversification. I should divide my money between these types of investments.

11. ق Principle 6: Dollar Cost Averaging!
Dollar cost averaging is buying at intervals: Dollar cost averaging is a technique by which
an investor divides the given investment over a period of time and invests that
amount on a regular basis as opposed to buying in all at once. When I buy the same
stock or mutual fund at regular intervals and with a fixed amount, I am said to be using the
dollar cost averaging method.
If the market price of the selected stock or mutual fund declines, the investor will buy a
greater number of shares. On the other hand, when the market price of the selected
stock or mutual fund increases, the investor will buy lesser number of shares.
Dollar cost averaging reduces risk of price fluctuations: By putting in, say, $100 each month
(rather than a large amount once a year), I sometimes buy when the prices of the
units of the fund are higher, and sometimes when prices are lower. In the end, the
purchase prices average out. I can hence reduce some of the risk that poor timing
and potentially adverse price fluctuations will have on my investment decisions.
Just about any fund company or bank will let me invest like this with an automatic
payment plan.
However, dollar cost averaging will not protect me in a steadily declining market.
Further, if I discontinue with a dollar cost averaging plan, I will lose money when
the market value is less than cost of the shares.

12. Month Dollars
Invested
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 about dollar cost
averaging is that it gets me into the habit of saving every single month. Dollar cost
averaging permits systematic contributions to an investment portfolio periodically,
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 in the investor buying the
selected stock or mutual fund at an average cost per share that will be less than the
average price per share.
For example, assuming that a person invests $100 per month for 12 months in a
Mutual Fund; as can be seen from the below table, the average cost per share is
lower than the average price per share.

13. ق Principle 7: Risk Tolerance!
“risk is the other side of investing”
-Ojijo
Risk is a necessary element of life. There is always the chance that something will not
work out for me and this chance is called risk. There is a risk in everything I choose
to do in life including my financial life. The broad range of investment
opportunities represents varied levels of risks and rewards. 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 Treasury bills.
Among many, many other things, this law suggests that to earn returns high enough
to build true wealth, I have to put some of my money in risky assets like stocks-the
only investment to handily beat inflation over time. As Rich Dad said, “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 will receive. This applies to
investments but also to life decisions. In the financial world this is illustrated when I
choose to invest in a stock over a safer investment. The extra risk I take is rewarded
in terms of the stocks growth. In our personal world this is illustrated in a decision
to attend college. Attending college is essentially a case of one assuming a risk. I am
foregoing years of income for the chance that the increased education will pay off for
me in more income in the long run. This is actually a pretty safe investment 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 have to pay the price. And the
price involves study, lots of study. I need to study the basics of business. So to be a
rich investor, “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, every entrepreneur should take risk
reduction measures. I can do this by applying various strategies:
Experimenting: The first strategy is to experiment. This involves taking action through a
series of low cost events and projects before committing a great deal of resources
(time, energy, skills and money).

14. Risk Sharing: Risk sharing by partnership with individuals or corporations that have
complementary skills will increase the chance 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 rule surrounding
all investing is: I should not spend more than I can afford to lose. This is the absolute
truth. As a general rule in risk taking, I should not take more risk than ability,
willingness or need dictates. I should take risk with money I can afford to lose.
Risk Should Depend On My Investment Objectives: The two main investment objectives are
income generation and capital appreciation. Capital appreciation will require high risk,
high return investments like equities, while income generation require low risk,
fixed securities, like bonds.
Risk Should Be Based On My Financial Position: As multi-millionaire, in an effort to
increase my profit for the year; I may have no problem putting down $100,000 in a
speculative real estate investment.
Risk Should Be Based On My Age: A 75-year-old widow living off of her retirement
portfolio needs income from her investments to survive, she cannot risk losing her
investment, and takes a passive investment strategy. A 35 year old young executive,
on the other hand, has time on his or her side, and hence, takes an aggressive
investment strategy.
Diversification Mitigates Risk: Whatever my personality type, putting my eggs in
different baskets protects me from a failure in one industry sector, or one company.
Knowledge Mitigates Risk: The more extensive my knowledge of what has been 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 the best information.’ said Benjamin Disraeli. I
should build my knowledge base to help me in achieving financial independence.
Whether it takes a week, a month or a year to become thoroughly knowledgeable, it
does not matter. I should start learning immediately, today. Investing is a big bet on
an unknowable future. I should accept I need to learn, and then learn. This will
reduce the risk of venturing into this unknowable future. Think about how much
information I have! Too little increases risk. Warren Buffett said, ‘Risk comes from not
knowing what you are doing.’

15. ق 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 inside investor, 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 and improves my
investment returns.
I don’t need to be an expert in order to achieve satisfactory investment returns. But I
must recognize my limitations. It’s vital, however, that I recognize the perimeter of
my “circle of competence” and stay well inside of it. I will focus on the future
productivity of the asset I am considering. No one has the ability to evaluate every
investment possibility, but I need to forecast for five years to ten years, at the least. If
I lack the ability to estimate future earnings, I should move on to other prospects. If I
don’t feel comfortable making a rough estimate of the asset’s future earnings, I will
forget it and move on.
I need to be an informed investor. Investing is the key to building wealth, but investing
in and of itself is not enough. If I have to invest, I need to invest wisely! I do not
need to be a financial expert to invest, but I do need to learn some basic terminology
and concepts so that I am better equipped to make informed decisions. This is what
this guide is all about. Investment is not speculation. Investment is informed
speculation. My financial goal is to be informed enough to understand and analyze
what I hear. Then I can decide what fits with my investing personality. When asked
how he managed to become a rich investor, Warren Buffet said, ‘we read hundreds and
hundreds of reports every year.’
Investors are willing to pay for knowledge. They read books, journals and magazines
ranging from investing to personal development. They attend seminars to improve
themselves. They are voracious. Successful investors know that their cup of
knowledge must never be full so they always keep their minds open; ever ready to
learn. Robert Kiyosaki reminds investors that investment is all about being an
insider. To be an insider today, I will be informed. As Kiyosaki says, “knowledge is
the new money”.
I make the most money as an investor by being financially literate as well as knowing
internal strengths and weaknesses of the investment. I find the best investment
opportunities from understanding accounting, the tax code, business law, and corporate law.
The more I read financial statements, annual reports, and prospectuses, the more my
financial intelligence, or financial vision, increases. Over time I will begin to see

16. things that the average investor never sees. It is in these invisible realms where the
real investors shop for the biggest investment bargains. As Warren Buffet says, “the
income statement and balance sheet the magic carpet of investing.” Learning to read
financial statements is a tedious process, especially when I first begin to learn. The
good news is that it gets easier and faster as I practice. But not only does it get easier,
but I can also review many more investment opportunities almost automatically
without thinking, just like riding a bike, or driving a car.
The reason most people suffer financially is because they purchase liabilities and list
them under assets. If I want to be rich for generations, I must know the difference
between an asset and a liability. I must know the difference between something of
value and something that reduces value. I will always remember that my expense is
someone else’s income, and my liabilities are someone else’s asset. When I am out of
control of my cash flow, I make the people who are in control of their cash flow rich.
I need to understand the financial ratios, mainly the return on equity, return on assets,
and return on capital, which all analyse how the transforms capital into profit for
investors. The other ratios are debt to equity ratios, or leverage ratios, which indicate
what percentage of the company is funded by debt, and hence, how much more debt
the company can absorb before it becomes fully leveraged.
Warren Buffett never invests in businesses he cannot understand or that are outside his
“Circle of Competence.” All investors can, over time, obtain and intensify their
“Circle of Competence” in an industry where they are professionally involved or in
some sector of business they enjoy researching.
Buffett’s logic is compelling: “If you own a company (either fully or some of its shares) in an
industry you do not understand, it is impossible to accurately interpret 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 I cannot illustrate with a crayon.’

17. ق Principle 9: Re-Investing & Compounding!
Reinvesting means plaughing back what I earn as profit into purchasing more assets,
hence, investing it. When I am investing, I should not be a hungry investor. If I make a
profit, at least 50% should be ploughed back in investments. Compounding is the
most important principle in saving and investing. It has been called the eighth
wonder of the world. It is the key concept of any saving and investing plan. Albert
Einstein called compound interest ‘the greatest mathematical discovery of all time’. This
is true partly because, unlike the trigonometry or calculus I studied back in high
school, compounding can be applied to everyday life, and in finance, it applies to
amplify the growth of my working money. Whereas investing maximizes my earning
potential, compounding maximizes the earning potential of my investments.
Compounding makes money make more money: The wonder of compounding (‘compound
interest’) transforms my working money into a state-of-the-art, highly powerful
income-generating tool. Compounding is the process of generating earnings on an
asset'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 to accelerate the income
potential of my original investment, which takes the pressure off of me.
Compounding is premised on the doctrine of the Time Value of Money. (TVM). Time
Value of Money (TVM) is the idea that money available at the present time is worth
more than the same amount in the future due to its potential earning
capacity. This core principle of finance holds, provided money can earn interest, any
amount of money is worth more the sooner it is received. The time value of money
demonstrates, all things being equal, it is better to have money now rather than
later. I need to start investment now, today. I need to start investing now, today. By
giving my investment more time to grow, I earn myself more money. Investments
start to grow slowly and then accelerate. The invested money accumulates interest,
and the accumulated interest is itself accruing more interest. Everyone knows that
money deposited in a savings account will earn interest. Because of this universal
fact, I would prefer to receive money today rather than the same amount in the
future. The earlier I put money to work, the longer it works for the members, and
the more wealth is generated. It makes a lot of sense. Wealth is generated via
production. The longer my money works in good companies, the more time it has to
produce further profit; 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 is realized by reinvesting the earned
income or interest. Reinvesting is the investment of both principal and income from
principal rather than distributing it as dividends or profits. Reinvestment of resources is a
useful strategy that all entrepreneurs regularly employ. As long as I do not need the

18. income (from dividend payouts), It is generally a good idea to reinvest. Reinvestment
dovetails with the investing maxim of ‘dollar cost averaging,’ which holds that
investors do well to consistently invest small amounts of money. The return I
receive on an investment is interest. If I invest $20,000 and it returns a modest 10% a
year then I will have earned $2,000 in interest. Compounding interest is the
escalating effect of interest. As an example, if my $20,000 investment was returning
10% per year after 10 years I would expect to receive $20,000 in interest. Actually it is
much more than that. Compounding interest ensures the amount I earn is more. 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 because I reinvested that $2,000; it works together with the
original investment. This means the amount of interest I receive in year 2 is greater
than year 1. This interest I am earning is compounding. Every year, my investment
compounds more and more. 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 first thought. This little bit extra
may seem like peanuts, but I did not have to lift a finger to earn that $2,210. More
importantly, this $2,210 also starts to earn interest. At the end of 10 years my
investment is worth $51,875. I have returned $31,875 and not $20,000.
Dividend Reinvestment: When I am paid a dividend, I typically can choose to receive it in
cash or reinvest it and purchase additional stock. Dividend reinvestment is a
systematic method of accumulating shares of a stock that pays a dividend. Many
investors use dividend reinvestment as part of a long-term buy-and-hold investment
program. This will happen even as I send voluntary contributions to purchase
additional shares. Further, putting dividend reinvestment stocks in a retirement
account can shelter the dividends from current tax liability. If I choose to reinvest
our dividends, in effect, we're taking the dividend payment in stock instead of cash.
Reinvesting dividend income is an important part of the overall return on our
investment as a club. It is similar to compounding interest, with the principal of our
investment constantly growing and theoretically paying higher dividends each
quarter. The process takes time, but reinvesting our dividends can increase our total
return in the long run. The cool thing is that I can put all of my profit back to work,
and effectively have more money generating more profit. This process can keep
iterating so long as I do not withdraw my money.

19. ...........................
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.aj
uoga.com, www.bankitgroup.com,www.parara.com and www.achibela.com.
Email: ojijo@allpublicspeakers.com Mobile:+256776100059