THE CRASHING STOCK MARKET- A GODMINE IN DISGUISE

The news that prices of stocks worldwide has depreciated greatly is old news. The Nigerian stock market is not spared at all as most of its listed equities experienced free fall. The worldwide financial melt down attests to the fact that the world indeed is a global village. Words like recession, credit crunch, job cuts / lay offs are now household names. In a lay mans words, funds were lost at a great magnitude while the remaining fraction can not get within reach of all citizenry. Thus, a plethora of unmeet demands. This is traceable to reduction on expenses by major agencies, institutions and organizations.

If you have been playing the Nigerian stock market prior to this time, how have you been involved?

 What stocks did you buy?
 Are you buying from the secondary or primary market?
 What did you know about the characteristics of stocks?
 Did you join the train because a friend, relation, spiritual leader, investment broker or stockbroker pulled you in?
 What did you plan to achieve with your investment?
 Can you repeat any desirable result achieved?
 Do you have an investment plan?
 Do you have and know your stockbroker?
 How do you monitor your investment?

Everyone who owns part of any quoted company shares claims to be an investor. However, it is not every player that is an investor. Among the lot, we have the following: -

 Gambles and speculators
 Spectators and cheerleaders
 Real investors


GAMBLERS AND SPECULATORS:
These are individuals and groups who heard that the stock market has been giving positive returns on investment and jumped into the market. They know little or nothing about fundamental or technical angle of the market. Their only desire and expectation is to buy today and sell tomorrow with mouth watering profits. Over 80% of their decision is embarked upon by guess work with zero facts and figures. They are interested on price appreciation only. They made money, informed friends and well wishers and even borrowed to invest. They form the bulk of losers in the present situation.


SPECTATORS AND CHEERLEADERS:
These set of people are involved in the capital market officially. They appear and speak like the main actors. They form the bulk of the media and spokes persons of co-operate or individual investment houses. They inform the whole populace of daily events on the trading floor and trade information about quoted companies. Unfortunately, most of them do not make their profit directly from taking positions on different listed equities; rather they are salary and commission earners. They promote upcoming companies, bring recent news emanating from the desk of existing companies and lastly, they are mostly behind some buy and sell recommendation about capital market. The information frenzy for or against the market emanates from them. Just call them an equivalent of supporters club in a sports arena. They laugh and cry more than the real actors.


REAL INVESTORS:
Investors are value driven men and women. They are actively responsible for the relative stability in the market place. They are synonymous with long term investments backed with the basic information. Investment for them begins with their education about the goings on in the market first. In the short run they are slow, while in the long run, they achieve lesser results. The dogma of slow and steady wins the race is their personal law. Market panics do not affect their them. They gain both in bearish and bullish periods of the market. Long time experience and consulting on already successful mentors via the capital market fashions their pattern of investment.


THE NIGERIAN STOCK MARKET:
The Nigerian Stock Market witnessed an upward spiral trend from 2006 till the first quarter of 2008. Within this said period of time, the Nigerian stock market was the toast of Tom, Dick and Harry. Following the re-capitalization and
Consolidation of Nigerian Banks and Insurance companies, almost all of them and other companies from other sectors of the capital market approached the publics with juicy public offers and private placements.

Funds flew into the country from various destinations into the capital market and the tempo of equity investment hit the roof top.

As the indices of the market gathered points on daily basis, the banks increased their lending capacity with many products which led to high liquidity, stock oriented publications hit the news stand, radio and television programmes evolved, stockbrokers unleashed marketers into all the nooks and crannies of Nigeria and abroad.

In the middle of progressive expectations, the market gradually headed southwards. Unannounced, things fell apart and tales of woes ensured. On the average today, almost all listed equities on the Nigerian Stock Exchange has lost about 65% of its highest price of 2008. None of the odd and newly listed stocks were spared.


IS NIGERIA STOCK MARKET SICK?

The answer is No!

The basic fundamentals of the market are still intact. The colossal free fall of prices of stocks is as a result of global financial meltdown. You have to understand that though prices of stocks are related to the management of companies, it does not holistically determine the earning of a company.

None of Nigerian listed company has announced a major lay off or loss in their quarterly results. Rather, we have a situation where they are expanding both locally and abroad with mouth watering results in quarterly results.

So, the challenges being faced now are not fundamental one.


WHY DID PEOPLE LOSE SO MUCH MONEY IN THE MARKET?

There was an absolute lack of adequate dosage of information about the capital market. Many of the market leaders were carried away with the income accruing from commissions on daily sales coupled with good results churned out respective companies. Regrettably, many stockbrokers never had access to the required information that rules the market, they lost more than their clients having borrowed to invest before the burble burst.

According to Punch Newspaper report of 4th February, 2008, stockbrokers are owing banks over N300billion.

The regulatory bodies of the market never gave any information regarding in-flow and out-flow of income sourced from abroad. These funds came in announced but left unannounced.

A greater percentage of the market players are short term investors who plays the market with borrowed funds. Thus, their investment never had tap root.

Here, table A show few selected stocks and how they faired in the present economic meltdown. The table shows their percentage losses between the months of March 2008 and February 2009.


TABLE ‘A’

MARCH 2008 FEBRUARY 2009 % LOSS DIFFERNCE
Zenith 43.60 12.07 - 72.32
UPL 9.59 4.49 - 53,18
NAHCO 23.50 6.25 - 73.40
LASACO 3.69 1.01 - 72.01
DUNLOP 3.69 0.57 - 84.55
FIDELITY 10.20 3.20 - 68.63
THOMAS WYATT 7.00 2.34 - 66.57
FIRST BANK 42.44 15.09 - 64.44
JAPAUL OIL 9.59 1.93 - 79.87
TRANSCORP 3.01 0.76 - 74.75
DONGOTE FLOUR 27.30 6.67 - 75.57
COSTAIN 28.82 6.36 - 77.93
FLOUR MILLS 83.02 14.35 - 82.72
GUINESS 123.01 70.31 - 42.84
NESTLE 221.10 127.05 - 42.54
ASAKA CEM 44.90 9.05 - 79.84
ADSWITCH 5.19
TATALIZER 3.25 1.4 - 64.92
WAPCO 54.06 12.50 - 76.88




HOW IS THE STOCK MARKET A GOLDMINE NOW?
In normal business transactions, the ruling practice is buy low, sell high. What goes up must come down and what went down must equally go up. As the market has crashed, it means that now it’s within reach at low prices. A look at Table ‘A’ shows that among the selected stocks analyzed, a greater majority have lost above 60% of its price as at 2008 March.

If the practice of buy low, sell high should be considered, now is the time to enter the market at a vantage position. Why? These equities will move back towards their real prices in no distant time. This is a rare opportunity to fortunes for nothing.

On the contrary, the stock market remains totally unattractive to the average mind. So is gold. It’s not found on the surface, even when seen on the surface, not everyone can recognize it until it’s purified. Now that prices are down people run away, they only come back when the price starts going up.

For example, few years ago, Intercontinental Bank Plc, JAPAUL Oil and Maritime Services sold its public offers at N14.50 and N3.95 respectively. Now the prices goes to N45 and N14.00 in 2008, while in February, 2009 it stands at N6 and N1.83 respectively. If you bought it then at public offer, and it was good, why shy away now? As warren Buffet puts it, stocks are what people sell when they should buy and buy when they should sell.




SUGGESTED INVESTMENT ROUTE:

To get the best out of the stock market investment, a long term approach is a better option. Why long term? It naturally affords one the chance to observe and learn the different ups and down of the market. Also you effortlessly take the profits of compounding returns on your investment. A long term investment is 5 to 10 years on the minimum.

To enjoy the best of long term investment choice, an additional input to the principal investment at various short intervals are prescribed for a greater positive profitability.

When this route is taken, you enjoy a 3-fold return on your investment. These include bonuses or script issues, dividends and lastly price appreciation.

With this approach you enjoy a relative peace of mind while your money labours for you.

Here is a cursory look at the returns on FIRST BANK OF NIGERIA Plc in the last 10 years



TABLE ‘B’
EXAMPLE OF COMPOUNDING OF INVESTMENT IN LONG TERM

An example with an investment worth 10,000 units of First Bank of Nigeria Plc last 10 years showing bonuses and dividend accruing from the investment.

YEAR NOS. OF UNITS BONUS DIVIDEND INCOME
1998 10,000 - 10k 1,000
1999 10,000 1 for 4 N1.00k 10,000
2000 12,500 1 for 4 N1.25k 15,625
2001 15,625 1 for 4 N1.30k 20,312.50
2002 19,531 1 for 4 N1.30k 25,391.60
2003 24,413 1 for 5 N1.50k 36,619.50
2004 29,295 1 for 8 N1.55k 45,407.25
2005 32,956 1 for 8 N1.60k 52,729.60
2006 41,195 1 for 4 N1.00k 41,195.00
2007 82,390 1 for 6 N1.00k 82,390.00
2008 96,121 1 for 4 N1.20k 115,342.20
2009 120,151
TOTAL = 446,272.00
Thus an investment worth 10,000 units of FBN in 1998, today worth 120,151 units which about N446,272,000 was received as cash income in ten years just doing nothing else.
Note, this investment in the year 2008 was at the tune of about N100,000 (ONE HUNDRED THOUSAND NAIRA) only. If it is sold today as the market is at its lowest position of N15,00 you will be cashing out at the total sum of N1,817,265.00!









ANY CHANCE OF EARLY RECOVERY:
Yes! The chances are great.

In the nearest future, many companies are likely to opt for the stock buy back option. (SBB) The share buy back option is a situation where a listed company individually buys its own shares from the secondary market. This happens when due to some market risk, the price of a given share depreciates below its intrinsic value. Such companies buys its stocks, holds it till the price returns to a desirable level, then they sell it back to the publics. With this approach the investors are protected while the stock remains well managed.

These quoted companies are turning out good results while their co-operate looks are not balanced, thus it’s a likely option.

Secondly, as the prices have bottomed out, the capitalist who made it big before and new ones are gradually staging a come back into the market.

Thirdly, some individuals or organizations who have been eyeing board membership of some listed companies are at advantage to do so as a smaller cash investment can earn them a sit now that the prices are low and apathy entails.

Lastly, as government resumes spending for the 2009 fiscal year, such funds might find their way back to the stock market.


CONCLUSION:

The capital market remains one of a country’s gradation index, thus the regulatory bodies cannot leave it to hit the rocks.

History has shown that stock market crashes worldwide gives rise to a better and stronger new structure as it recovers.

On a parting note, if the richest man on earth, the sage of Omaha and CEO Berkshire Hartaway Warren Buffet invests on stock only, do you still doubt the potentials of the market?