- - Benjamin Graham
- - Hi, I’m Mr. Market
- - The Case of NASCON
The stock market is a highly illogical place where sheep-like participants
follow the flock and buy when prices rise and just as mindlessly sell as prices
fall. The disciplined, rational investor neither follows popular choice nor
plays market swings. Rather, he searches for stocks selling at a price below
their intrinsic value and waits for the market to recognize and correct its
errors. It invariably does and share price climbs. When the price has risen to
the actual value of the company, it is time to take profits, which then are
reinvested in a new undervalued security. – Benjamin Graham.
Benjamin Graham
In my opinion Benjamin Graham was best described in Adam Smith’s words when he said, “There is only one Dean in our profession, if security analysis can be said to be a profession. The reason that Benjamin Graham is undisputed Dean is that before him, there was no profession and after him they began to call it that.” Another popular appraisal refers to him as the Father of Value Investing.
The term Security Analysis is now more popularly referred to as Investing and this in turn has been derogated to encompass such anti-graham practices like Speculation. On this web log I’ll try to use the terms Security Analysis, Investing and Fundamental Investing interchangeably, while, Speculation and Technical Investing will be used likewise. I won’t mind a subtle correction when I err off the path of this convention (as I most likely will).
But why was Graham referred to as Dean? Well, the answer is; he was literally that. Not only was he a University Don, teaching investment for 28years at Columbia University, he also wrote two of the most comprehensive and widely read books on Investing: Security Analysis: Principles and Technique, and the Intelligent Investor: A Book of Practical Counsel. In fact, Warren Buffett celebrates the Intelligent Investor as “the greatest book on investing ever written”. But what is really astounding is that Graham matched his success as an academic with success as a professional investor. However, his unique method of teaching is what my focus is today. He was particularly fond of parables. So I’ll like to introduce to you, what has been described as the best investment analogy in history, please meet Mr. Market.
Hi, I’m Mr. Market
Take a moment to imagine you where in a business venture with a weird partner named Mr. Market. Mr. Market is set back emotionally and this gives him a strange character. Today he might be very excited, the next day he might be very unhappy; manic-depressive is the best description. Although, in most cases, he has no hands on experience in the venture, he is strongly opinionated about the business’ outlook all the same, judging it in the two extremes of his sinusoidal emotions. So what’s Mr. Market’s role in the firm? Nothing much, he walks up to you everyday and offers his interest in the company for sale. This largely depends on his mood that day. If he’s very excited, his outlook of the business’ horizon is bright and this affects his price which would be ridiculously high. However if he is feeling depressed, he offers his interest for a lot less; the horizon to him is gloomy and this makes him moody. Another funny thing about him is that he is very accommodating. If you reject him today, he’d come back the next day and ask you again. Now, here is the best part; all the while, the operations of the company remained dynamically the same! You still have your clients; you still make your sales… I mean, the value of the firm has being totally unaffected by Mr. Market’s emotions! This puts you, his partner, in a very powerful position. As a Value Investor, what you have to do is; wait until he offers you a price that is relatively low. Then buy up as much of his interest as you can afford. Don’t bother about him finding out, he doesn’t care; he’ll come back the next day and ask you again!
The Nigerian Stock Market and the Case of NASCON
The moral of the above story is pretty straight forward; the state of the stock market on any particular day has no effect on the true value of a company.
Today, the Nigerian Stock Market is Mr. Market personified, reacting to an unclear atmosphere in a wave-like unjustifiable action. In our case “Mr. Market’s” reactions can be reasonably predicted as they are stimulated by certain events that have come to be obvious. Some of the events that make “him” depressed are; the resumption of schools when parents prepare their wards for another year/term, the approach of the Christmas holidays when people need money for the celebrations, and more vaguely, the National Elections when people are unsure of the outcome of the elections. These things result in massive (and usually mindless) withdrawals from the stock market causing a bear situation. Some of the things that make “him” manic are; the rumor of a possible bonus issue (as is the case with Zenith Bank today), the acquisition/merger of a company with another that might increase profitability (as is the case of Diamond Bank today), and, this might raise a few eyebrows, the Dangote brand name. The last of these, deserves special explanation. Though it is too streamlined and looks like a long shot, but how else would you describe the case of NASCON?
NASCON started the year at N0.69, within a few weeks of its merger with Dangote Salt and the subsequent re-listing at N5.00, it short up astronomically hitting N31.20 a few months later. Who would buy NASCON at N31.20? You might ask, well, I asked that too. Let’s get a little orientation about the Company.
National Salt Company, as the name implies, was into the production and sale of salt. In recent years, it ran into murky times and crawled to Dangote, cap in hand, offering to sell 2.1billion ordinary shares to him in what seemed like a take over. Dangote bit the bait, liquidized Dangote Salt and took over NASCON. It is not clear how much he bought those shares, but at least it was pretty vivid how much they were listed; N5.00. That’s the past.
Today, the managing director of the firm Mr. Ade Adeniji has revealed part of its “organic growth plan” which includes; the commencement of the manufacture and distribution of other processed products to substitute imports and as well be a major company in food production. In short, they are diversifying. That’s the present. Is this what is getting “Mr. Market” excited? Let’s examine the figures:
The managing director stated that following the company’s present good fortune, it is now poised to pay dividend for the first time in 12years! NASCON is hoping to make a profit after tax of N1.4billion, N2.1billion, and N2.6billion for the year 2007, 2008 and 2009 respectively, thus paying a dividend of 63kobo, 97kobo and N1 accordingly. Is this a good reason to buy NASCON at above N30? I think not! This is measly compared to price.
NASCON was scarce on the market for a long time; consequently Mr. Market kept raising his bid. At the peak of the drama, Dangote stepped in and offered 400million shares at N22! (The guy is a genius). Mr. Market had actually requested 2billion shares, Dangote offered 400million. If we assume that Dangote bought his at N5 per share and we further assume that he paid for 2.1billion shares, then it follows that he invested N10.5billion in NASCON. A few months later, Mr. Market in his manic madness buys a measly 400million at N8.8billion, recouping a whooping 83.09% of his initial investment in a few months and still keeping most of the company. That is a Value Investor! He took advantage of Mr. Market’s emotions and got praised for it. In fact someone even suggested that other entrepreneurs emulate his example, you can be sure it won’t be long before this request is granted.
As I look up to the sky searching for investment clues, I wonder why Mr. Market doesn’t feel, at least, a little bit used. I think carefully of how Dangote has won, and then I decide that I’ll just do as he has done.
Research Tip: Studying the life of Benjamin Graham will tutor you in no small measure on investment and related issues. I strongly urge you to do just that. You could begin by reading the articles in the sidebar -->
Expense Tip: Perhaps you could take advantage of Mr. Market yourself by keeping some money for Dangote Flour, predicting with a certain degree of reasonability that "he" would be manic again with that brand name.
All opinions are those of the Author and are presented here for pedagogical reasons.
