Your Currency, Your Poverty: why focusing your thoughts on the Naira might be the reason you are poor…

I was a millionaire in my early 20s. But I quickly recognized even then that a few millions (dollars) did not amount to much. I could not afford my preferred lifestyle on such a small fortune.

– James Dale Davidson, “Affording the Good Life in an Age of Change.”

Exorbitant Exchange


I had this idea few years ago but an event occurred a few weeks ago that has triggered my sharing it with you. I was fortunate to be around a young business man who kept receiving calls from clients, and in a somewhat penitent tone, he insisted that his price of 165 was not exorbitant because the CBN just announce an exchange of 161.5. Apparently he was talking about the dollar. In another call, to a friend probably, he said that Nigerians are in trouble because prices will sky rocket. Pragmatically, his statement seems to possess a good deal of verity, but by the end of this essay, I’ll try to show why it might be an illusion.


The Nigerian Millionaire


Early 2007, I was unfortunate to be within ear-shot of a couple of young men arguing over the millionaire status of the MD of the company in which they worked. The fulcrum of the first man’s argument was that; since the MD drove a N6million Toyota Camry 2007, then the MD is a millionaire. The other man, on the receiving end of this grave assault to the human ear, aptly pointed out that; N6million was just about $45thousand. The first guy ruptured my ear drums by sharply retorting: “a millionaire in America is a millionaire in America and a millionaire in Nigeria is a millionaire in Nigeria.” Hmmm…this led to my postulating the first (and I dare to campaign; only) rule of the millionaire status:

A millionaire has “NO” geographic restriction.

A millionaire in New York is one in Rio de Janeiro, Reykjavik, London, Lagos, Istanbul, Tel Aviv, Dubai, Moscow, Bombay, Tokyo, Bangkok or Sydney.

It’s all in the mind…


My Wallet; My Footstool


Last year, a friend of mine proclaimed on his personal page: “When I stand on my wallet, my head touches the ceiling!” The statement seemed metaphorically ingenious and also hilarious. One could only wonder what standing on a wallet stuffed with lots of money will feel like. But on a closer look, coupled with a little thinking, you’d realize that my friend is not as ambitious as he thinks… If only he could see that if he stuffs his wallet with, say, the old Ghanaian Cedi, his head will probably be scraping the sky, or more ambitiously, with the Zimbabwean Dollar (with inflation in 9digits), he’ll probably be speaking directly to God! Although I doubt God will be very impressed with this fit, judging by my only known historical precedence of such an event; The Tower of Babel.

But what if my friend was gripped with true ambition, and he stuffed his wallet with, say, the US Dollar or the British Pound? I’m sure he wouldn’t make a stack high enough to form the heels of his girlfriend’s latest shoes!

It’s all in the mind…


Who wants to be a Millionaire?


I always imagined myself speaking to a group of students at one of our universities and throwing this question out to them: “Who, in this hall, wants to be a Millionaire?” The response is predictable; most people will thrust their hands up eagerly, save some who, probably, weren’t listening or who think I’m bad looking.

Now, I take my thoughts a little further and imagine speaking with a group of students in an American university, University of Michigan peradventure, and I throw the very same question to them: “Who, in this hall, wants to be a Millionaire?” The result will probably be similar to that of the Nigerian University.

But now, I’m throwing this question at you: “Do you think the Nigerian students and the American students were thinking of the same millions?” The answer is No! There is a Mathematical deception here; while 1000000 in Nigeria is 1000000 in America, 1million US Dollars is NOT 1million Naira, it is now 165,000,000 Naira! The same question, the same result, but not the same mind-set! While we align our ambitions targeting our millions in multiples of ‘1’, our American counterparts align their ambitions targeting their millions in multiples of 165! The difference is high, the economic results are overwhelming.

So it doesn’t surprise me that a student says he is comfortable with N50000 ($310) a month, or that another naively describes a millionaire as one who has accumulated N8million ($50000) or that someone who gets paid; N200,000 a month and drives a 10year old Honda Accord he polished with a few thousands, assumes he has arrived…

It’s all in the mind…

While I admire the “Who Wants to be a Millionaire” show sponsored by MTN for its promotion of knowledge, I’m not a big fan. This is because it fosters the illusion that winning the ultimate prize money (N10million) makes you a millionaire. It doesn’t. That show is supposed to be a Nigerian impression of the original American version, however, it was copied poorly; the American show really makes you a millionaire ($1000000). (By the way, MTN probably makes real millions from the calls you make to get on that show.)


Think in Dollars


So what I’m I driving at, you ask? You should begin to think of achieving your goals with a dollar mind-set. (Consider that a completely untouched salary of N1million a month i.e. N12million a year hits a million dollars in about10years if left unfertilized (assuming an imaginary average exchange rate of N120 to the dollar)).

Remember that guy in the beginning that said Nigerians are in trouble and how I’m supposed to prove/disprove that statement? Here goes: Taking an extremely simplistic situation;

Assume you are in the business of importing quality ball-point pens for retail. Two things to consider:

• i. The currency of international trade is the dollar
• ii. Most goods in Nigeria are imported, giving credence to the guy’s conclusion

(If the goods weren’t imported, the materials to make them probably were).

Now, the exchange rate is N120 to the dollar. The unit price of your pens is $1. So you sell at N150 to pocket a N30 profit. But late one evening, on the evening News, CBN announces a sudden change of rates to N165 to the dollar. To stay in business, you shore up your suddenly depreciated capital to buy more ball-point pens, which are N165 each now and sell to consumers at N195 (or higher) to maintain your profit margin.

To you and to your customers, prices have gone up! Things are expensive! (And they are; like my friend told me yesterday, even artificial eyelashes are affected by the dollar price).

But wait; there are two sides to a sale. What happened to the man who sold the pens to you? He still gets his $1!

Prices will go up because employers do not raise or lower salaries commensurate with the vacillation of the dollar.

How do you beat the system? Make your money in Dollars. How? That, my friend, is your assignment. But first internationalize your thoughts and think in dollars.

The Nigerian Bear Market; is it really a good time to buy?

• The Case of TransCorp
  
• The Case of Nascon
• The Case of Oceanic bank plc

For anyone who will be investing for years to come, falling stock prices are good news, not bad, since they enable you to buy more for less money. The longer and further stocks fall, and the more steadily you keep buying as they drop, the more money you will make in the end if you remain steadfast to the end. Instead of fearing a bear market you should embrace it… Jason Zweig.


In recent times, I’ve had people walk up to me to ask what I think of the present market situation and what I think they should do with their money. The little more enlightened ones ask the confirmatory question; is it really a good time to buy? My answer is usually ignored for the more deafening advice of fear and more effective pounding of their quickened heart beat.

A few months ago, just before the market slipped into recession, when stock prices where high with a corresponding high-spirited followership, there where IPOs, POs, stock seminars, investing gurus sprung up from desert grounds of nothingness; we had penny stock gurus, blue chip gurus or just plain gurus, stock newspapers sold like lozenges in the raining season, all saying the same thing: BUY! And boy, did people buy!
Fast forward a few months to the present; IPOs are announced in near shy-ness, POs have receded to a trickle, stock seminars have vanished, stock newspapers are cooling their feet at the stands, and the gurus, well, they are still there, only they are whispering now: “it is the best time to buy…” But no one is listening, no one is willing, no one is buying.

So is it really a good time to buy? I’ll try to answer this question by putting things in perspective. Like Robert Greene says; ideas are best communicated in metaphors.

The Case of TransCorp

The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he should refrain from buying and probably would be wise to sell. --Benjamin Graham, the Intelligent Investor.

A very good friend of mine, Kehinde, was sharing an anecdote with me in his usual delightful exaggeration. He was telling of his father’s bitterness towards the performance of TransCorp. He said if one wanted to discuss say, transport, with his father and begins the conversation by saying, trans… There will be a visible transformation of his father’s visage, complete with pulse racing at the neck region and eyes narrowing in apparent anger, only after the word is completed with, “port”, will his father’s psychological and mental balance return to normal saving the person confabulatory anguish. (He didn’t tell of the consequences if the word was actually completed with “corp”, my guess is that would have being a more delightful story).

As humorous as this story is, many of us are very much like my friend’s father. We sunk thousands or millions on TransCorp based on promises; promises of a better future, and now we want dividends (actual and metaphorical) even in the face of contrary evidence. The prospectus of TransCorp’s IPO clearly stated that it expects to make an N8billion (8,166,433,000) loss for the year 2007, another N1.9billion loss for 2008. TransCorp expects to pay its first dividend of 5kobo by 2010 and 2nd dividend of 8kobo by 2011. And so far TransCorp has done its best to keep its promise.

My point is, doesn’t it defy logic that we bought TransCorp at that time for N7.50 per share and now, with almost nothing changing (except for bad press and a little more enlightenment on the ever present trouble at NITEL), we refuse to buy TransCorp at N1.50?
This is not to say to buy or not to buy TransCorp but to point out the hitherto obnubilated illogicality of buying at N7.50 and not buying at N1.50.

The Case of Nascon

The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. -- Benjamin Graham, The Intelligent Investor

It is still very fresh in my memory billionaire Aliko Dangote’s “Largesse” and the public applause that went with it. I remember vividly how people stepped over each other and nearly wiped out Nascon’s availability from the stock market. They purchased Nascon stocks at the “discounted” price of N22 per share. This is 159% of the present price of N9. If Dangote’s magnanimity scrapped bottom at N22 and caused a stampede, what would you expect with Mr. Market’s (link) price of N9? An avalanche, a Tsunami, or even hurricane “Buy-Nascon”? (For all our lack of natural disasters). But no, we have none of these. Instead, by stock market mathematics, many of those who bought at N22 are selling their shares faster than a salesman with an impossible deadline. Is this logical? What part of Nascon’s business is worse than it was then? If anything, it’s better, way better than I expected. Not that I think N9 is a good price or that Nascon is a good investment, but if you bought it then, why are you refusing to buy now? Or worse why are you selling now? How come you don’t consider it "cheap and heavily discounted"? Doesn’t this defy logicality?

The Case of Oceanic Bank Plc

Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies. -- Benjamin Graham, the Intelligent Investor.

On Monday, 5th March, 2007, the Oceanic Bank International Plc share offer opened. By the time it closed sometime in April, 2007, all shares offered had been bought with a whooping 215percent oversubscription easily making the bank Nigeria’s largest bank by shareholder’s funds at the time. Oceanic had offered 3.357billion shares at N16.50 per share, with a 215percent oversubscription… you do the math.

What, possibly, could have been the reason for such massive response? A quick look at the prospectus reveals that Oceanic had projected a profit after tax of N16.3billion by the end of 2007, N24.24billion by the end of 2008 and N29.32billion by the end of 2009. Could this be the reason people lined up in queues for hours to get this stock? I don’t know, but the figures looked good to many stock market pundits at the time. So, has Oceanic met its projections? No, it has SURPASSED its projections. By the end of 2007, the bank recorded a profit after tax of N17.5billion. A marginal increase, but when we consider the 4th quarter unaudited results released recently (Guardian, Thursday, October 9, 2008), things seem a little different. With a profit after tax of N41.2billion, it is hard to ignore Oceanic’s present price of N17.

So, do we have digital telephone call queues at stock broking offices begging to buy Oceanic? As the price suggests, this is not the case. Is this logical? Why did so many people buy this stock at the time based on relatively mediocre projections and would not buy it now based on Actual results?

Stocks should be bought like any other commodity, say, oranges. If you find a good orange for N10 and buy it, what would you do if you find oranges of the same quality (or better) for N2 each some time down the line? You either buy more or fight the person that sold the former one for N10. One thing you certainly wouldn’t do is; try (in some cases, very hard) to sell the orange you have for N2.

But then the question arises, how do you know good oranges from bad? At this point, I recommend you read the essays  and more importantly buy “the Intelligent Investor by Benjamin Graham”.

On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well established standards of value. –Benjamin Graham, the Intelligent Investor

Conclusively, study the words that are italicized,
Look closely and open your eyes,
They say not to buy when prices are high,
So is it really a good time to buy?
Your guess is definitely as good as mine…

Of Dangote Sugar and Economic Moats

• Moats
• The Value Investing Concept of Economic Moats
• Dangote Sugar; Quintessential Economic Moat


Moats

A moat is a wide water-filled ditch surrounding a fortified place, such as a castle. It was usually installed as a form of protection to keep unwanted persons or hostile opposition out of a sovereign area. It wasn’t unusual, in those days, to find a moat equipped with wild aquatic animals and, of cause, the wider the moat the better the protection.

With a history dating back to the 11th century, Moats, which are also referred to as “water defenses”, became an essential part of Castle design for a long period of time.
But how do moats relate to investing and who could possibly find a relationship between a moat and the stock market?

The Value Investing Concept of Economic Moats

“In business, I look for economic castles protected by
unbreachable ‘moats’.”
-Warren Buffett

Engage yourself in a little mental exercise by simulating a relationship between a Castle and a business/Industry. In place of a Castle imagine a business and in lieu of ‘water moats’ imagine ‘Economic moats’ represented by creative policies or ideas utilized by the business owner to stall a proliferation of that line of business. Thus, Economic moat involves the creation/utilization of ideas and policies, by a business owner, that put up significant barriers to entry into that line of business. It is the competitive advantage a company has.

After assimilating this concept, it would not be difficult to realize that the wider the economic moat, the longer it would take for would be entrepreneurs to scale the barrier and dilute the business. The company is said to have an enduring competitive advantage. Consequentially, the profitability of that business (castle) is secure for a long period of time, sometimes 10-15years hence, and so is your investment if you happen to have invested in such a company.

I’m writing this essay to show that Dangote sugar might be such a company.

Of Dangote Sugar and Economic Moats

Intangible assets generally refer to the intellectual property that firms use to prevent other companies from duplicating a good or service. Of course, patents are the most common economic moat in this category… A strong brand name can also be an economic moat
-Matt, Warren Buffett on castles and moats, www.37signals.com


The following excerpts from the Chairman’s letter in the Dangote Sugar offer unabridged prospectus (dated November, 2006) gives a rare view into economic moats in practice…

Strong barriers to entry:
The leading position of Dangote Sugar in the Nigerian sugar business is preserved by the following barriers to entry:
 
High import duties: The import substitution strategy of the Federal Government of Nigeria is designed to promote the development of local industries by setting low tariffs on raw materials and complete knocked down parts, and high tariffs on finished goods.
Accordingly, raw sugar is taxed at 5% compared to 50% (plus 10% sugar development levy) for white sugar. This tariff differential makes imported white sugar very uncompetitive in the Nigerian market.

Vitamin A fortification requirements: Nigeria has been a pioneer in the developing world in mandating the fortification of staple foods (such as flour, vegetable oil and sugar) with
Vitamin A as a means to eradicate Vitamin A deficiency and malnutrition amongst Nigerian masses.
Dangote Sugar has perfected and patented its Vitamin A fortification technology and fully complies with the fortification requirement. Very few countries in the world have similar requirements. None of the white sugar exporting countries has this requirement. Thus, for a Nigerian importer to meet the Vitamin A fortification requirement, it has to make a special request which will attract significant additional cost because of required customized production. In addition, Vitamin A is relatively unstable and difficult to transport, which makes the importation of fortified sugar more difficult.

High investment requirements: The cost of setting up a sugar refinery in Nigeria is quite high. The Company has spent approximately US$250 million to set up its refinery at current production capacity. Lower capacity factories are possible but may be less efficient because of reduced economies of scale.

It is my sincere hope that you have been educated. But I still encourage further research on the subject. You can begin your research by studying the Buffett articles on the side-bar -->
Happy researching.

Are You the Nigerian Stock Market? No, Just Call Me Mr. Market.

• - 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.

The Precarious Absence of Value Investing In the Nigerian Stock Market

“An investment operation is one which, upon thorough analysis, promises safety
of principal and a satisfactory return. Operations not meeting those
requirements are speculative.”
- Benjamin Graham

Getting Rid of African Trophies

I have always had something for computers so when programming happened to come up on my “learning-radar”, I just delved into it. Actually, it wasn’t so easy. But there was something important about the way I began studying programming that is related to our topic of discussion today; instead of looking locally, for the best and easiest language to begin with, I looked globally by searching the Internet and soliciting international help from the very best in that field. I ended up beginning with Python.

I won’t be surprised if you haven’t heard about the Python programming language but you see; that is precisely my point. Nigerians, like most Africans, have the habit of creating comparisons with those in their immediate environment. The result is a persistent celebration of mediocrity. So you hear such clichés as; “We are the giants of Africa”, or “We have the biggest economy in West-Africa”, or “We have 25 “mega” banks”, or “Our football team is the best in Africa” et cetera. The problem with all these African trophies is that, Africa as a continent has had a history of below average performance for most everything from politics to sports and has persevered with this till present. So the comparisons stand on the same rank as the proverbial one-eyed king in the land of the blind. It is thus not far fetched to say that this has occurred as a result of our continuous competition with ourselves without considering the broader horizon of the international community where people with visions of infinity exist and outwit each other. And yet we complain about our not getting anywhere in anything. We NEED to raise our targets.

Applying the Global Perspective to Stock Investing

Having said that, we could simulate a subtle application of this concept (i.e. viewing things globally) in our investing endeavors. Well you don’t have to do it, I have done it already. Let me give it to you straight; if you intend to make real money from the Nigerian Stock Exchange, you’ll need a lot more knowledge than Technical Investing can offer you. There is a more involving concept called “Value Investing” that has been used by the most successful Investors and is still in use today.

Investing Conventions Utilized Today

“…in speculation when to buy –and sell – is more important than what to by, and also that almost by mathematical law more speculators must lose than can profit.”
-Benjamin Graham.

On the introduction of the new capital base by the Central Bank of Nigeria, the Nigerian Stock Market enjoyed a deepening, an unprecedented awareness and an enhanced liquidity than has ever been in its history. In clearer terms; there is more money changing hands, a lot more people have an idea of what the stock market represents and there are more shares to buy and sell. These have introduced a new niche into the society, of which this web-log is an offshoot; those who want to know about investing in stocks and those who want to teach about investing in stocks. I have already advised that, to know more about anything you should look on to a broader horizon by considering the global perspective. But what about those who teach?

“I have long felt that the only value of stock forecasters is to make fortune tellers look good.” -- Warren Buffett

The media today is rife with “investment gurus” suggesting what you should buy or sell. In fact Meristem Securities has a double page infomercial in the Sunday Punch which sometimes contains a list of buy or sell stocks. Various “financial analysts” tell you to buy a certain stock for reasons such as; bonus issue by the company in question, good earning per share (EPS), good news that might impact the price of a stock etc. In essence they ask you to buy a particular stock based on technical analysis.
All these advices actually do work, But for how long? Technical analysis works relatively well in bull markets, which is what we have today in the Nigeria Stock Market, but it leaves regret and finger biting in its wake in bear markets, which is to come in a not too distant future. I have treated Technical analysis is two of my previous web logs

i. Examples of Technical Analysis on the NSE
ii. Further Examples of Technical Analysis on the NSE

And I must confess that I have made some money by this concept. However, I am aware that this cannot last for very long, the question is are you?

A Brief Overview of the Value Philosophy

“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.” – Benjamin Graham

I will like to iterate that some of the most successful stock investors such as Benjamin Graham, Peter Lynch, Joel Greenblatt, and of cause the richest stock investor, Warren Buffett, attained their success altitude by Value Investing. Another important point is that they are totally opposed to investing technically at least in carrying out their own Investments. I guess it only makes sense to emulate the real gurus, what do you think?

The peculiar thing about value investors is that their language is different. While the technical investor talks about bonus issues, the value investor talks about the company buying back its shares, while the technical investor buy the shares of a company, the value investor buys into the business of a company, while the speculator tries to profit from the day to day fluctuations of the stock market, the value investor NEVER follows the movement of the price of a stock on the market etc.

So what is value investing? Value investing generically involves paying less than the value of the assets in place of a firm. It is the act of investing in companies with low price-book values. Though this definition seems straight forward enough, putting this into practice requires the habitual exercise of inculcating a few new concepts into your usual investing convention. Some of the more popular concepts are given below

Never follow the day to day fluctuations of the stock market

“As far as I am concerned the stock market doesn’t exist. It is there only as a reference to see if anybody is offering to do anything foolish.” – Warren Buffett

The market only exists to make it easier to buy and sell, not to set values. Keep an eye on the market only for someone who is willing to sell a stock at a not-to-be-missed price.

Buy a business, not its stock.

“In our view, what makes sense in business also makes sense in stocks. An investor should ordinarily hold a small piece of an outstanding business with the same tenacity that an owner would exhibit if he owned all the business”
- Warren Buffett

Treat a stock purchase as if you were buying the entire business.

I will be introducing a lot more of the concepts of Value Investing in greater detail in the following weeks. Let’s enter a new phase of investing in the Nigerian Stock Market. Let’s embrace Value Investing. You can start by reading the references on the side bar or by googling the term “Value Investing”.

Happy researching.



I have nothing against Meristem Securities. They actually have a very fantastic site that is good for research, complete with financial statements and company analysis. Though they have a value approach to evaluating companies which is very useful, their stock suggestion is anti-value investing.
Visit www.meristem.com.ng


Value Investing: A concept for true stock market millionaires.

The Nigerian Stock Exchange: Understanding Essential Investor Vocabulary

The difference between a rich person and a poor person is that person’s
vocabulary. All a person needs to do to become richer is increase his or her
financial vocabulary. And the best news is; most words are free.
--Robert Kiyosaki.

I have had quite a number of people asking me what a bear is or what a bull is, typically wondering what these wild animals have to do with the stock exchange. And although Robert Kiyosaki has been strongly derogated around the internet, I still find some of his writings vital tools in driving home my point. One such tool is his believe in the power of one’s vocabulary. I mean, he was bang on the spot when he wrote:

In school, lawyers learn the vocabulary of law, medical doctors learn the vocabulary of medicine, and teachers learn the vocabulary of teachers. If a person leaves school without learning the vocabulary of investing, finance, money, accounting, corporate law, taxation, it is difficult to feel comfortable as an investor.

You will agree that a new subject will come to you as an unfamiliar foreign language if you have not acquired any familiarity with the words which define it. Investing is no different. So I have included here some of the most commonly used words relative to the Nigerian Stock Exchange with the hope that it will aid in setting you on the path to full comprehension of the innards of the stock market. This still requires further research on your part as the words are in no wise comprehensive.

Share/Stock

This is created when a company divides itself into small bits and sells each bit to investors at a specified price. Investors are however allowed to buy as many bits as they can (as per financial capability) or want (as per discretional decision). (Much like cutting a circular birthday cake into several cone-like parts at a party, and “selling” each part, instead of distributing them, to the participants present at the party. Only this time you can “eat/keep” as much as you can). This illustration, as simple as it may seem, might be very important as Warren Buffett (the world’s richest investor) is of the opinion that; when shares are viewed as tangible “parts” of a business, an investor acquires a deeper understanding of his portfolio and his mode of investing adjusts noticeably in a positive direction. After owning stocks (read ‘part’) of a company, you become entitled to share in its profit, losses and assets.

The Nigerian Stock Exchange

Usually an exchange is a place in which stocks, bonds etc (generally called securities) are traded i.e. bought and sold. The Nigerian Stock Exchange is just one of such. Other examples are the Tokyo Stock Exchange, the London Stock Exchange, and NASDAQ. Because of the definite quantity of shares available, there is room for fluctuations in price due to the forces of demand and supply (Adam Smith’s Invisible Hands). In fact, it is a market place where securities are sold, thus it is often called the Nigerian Stock Market.

A Stock Broker

As a rule it is unacceptable for anyone to sell or buy stocks/shares by himself without proper authorization. This is where a broker comes in. A Stock Broker is a person authorized to buy or sell securities for you in exchange for a fee, referred to as “commission”. To be able to buy and sell stocks yourself in Nigeria, you will have to go through the Chartered Institute of Stock Brokers.

Sector

When you open a stock listing page in a financial newspaper, you usually find that the companies are presented in groups called industries or “sectors”. Thus a sector is a group of stocks that are in relatively the same businesses. Some sectors in the Nigerian Stock Exchange include but are not limited to: Food, Beverages and Tobacco, Breweries, Construction, Leasing, Maritime, Printing and Publishing, Health, Transportation et cetera. I purposely avoided the more popular banking and insurance in an attempt to “open your eyes” to the other sectors available.

Initial Public Offering

An Initial Public Offering is simply when a company sells stocks of itself for the FIRST time. Any other sale is referred to as just Public Offering e.g. the present First Bank public offer. A Right Issue on the other hand is the sale of newly created shares to existing shareholders of a particular company

Market Capitalization

The Market Capitalization of a company gives an idea of the amount you would have to pay if you bought all the shares of a company at a particular point in time. It is a derived figure gotten by multiplying the price of a company’s stock at a moment in time by the total number of outstanding shares in issue of that company.

The Bulls

This is a financial slang for a conspicuous rise in stock prices. So when the stock market is generally characterized by a rise in stock prices it is referred to as a Bull market. It is also used in describing a positive adjustment in the prices of the most capitalized stocks on the exchange. It is the opposite of the Bears.

The Bears

This is a financial slang for a conspicuous fall in stock prices. In essence a Bear market is one plagued by gravity sensitive stocks. It usually brings with it depression and alarm from “bad” investors who are foolish enough to react to the emotions or sentimentality of the market.
I thought it amusing to share a humorous saying which goes: “While the Bulls go climb up the stairs, the Bears go out the window”. It is used to describe the painfully slow ascension of stock prices (in bull markets) and the seemingly accelerated rate at which they fall in bear markets.

All Share Index

An index generically, is a benchmark which is used as a reference marker to which financial performance is measured. The All Share Index is the benchmark for the performance of the Nigerian Stock Exchange. Other notable indexes are the Nikkei Dow Index and the Dow Jones Index. At a particular point in time, an index can give an idea as to whether the market is bullish or bearish. For example, the All Share Index has had an unprecedented upward movement from 34,450.45 as at 10th January, 2007 to 51,383.64 as at today 4th June, 2007. So we can say that in that time frame the Nigerian Stock Exchange was bullish. But it is believed that in the long run (which actually means decades), the index moves upwards.

Dividends

This is a portion of a company’s profit paid out to investors relative to their holding in the company. In Nigeria dividends are usually paid annually, but with Dangote Sugar Refinery plc pioneering quarterly payments, in no distant time other companies might do just that.

Bonus Issue or Scrip

Scrip is the issuance of newly created shares to existing shareholders, by a company, essentially relative to their present holding at that point in time. It is free and at the mercy of the benevolence of the company’s board of directors. Actually the company does not create the shares out of thin air, it actually funds it from reserves set aside by a process called “Appropriation” of the profit it has made after tax.

I really would love to continue but it is already beginning to look too long. So that’s all for now. If you are interested (I think you should be, I strongly urge you to, anyway) in learning more about Appropriation and similar financial concepts visit the EntrepreNoir’s Library on the side bar and study the article: Analyzing an Income Statement.

Happy researching.

Awaken the EntrepreNoir Within; promoting financial literacy one article at a time…

Mixed Signals as Nospetco Commences supply of LPFO to Benue Cement

News coming in during the past week indicates that Nospetco has finally come of the shadows. But it is not all good news as another weekly insists that EFCC is tightening the noose on illegal finance houses, giving subtle prominence to Nospetco. Given two extremes, this leaves choice to our discretion. I’ll present both cases here but first I’ll enumerate a few of the scarce ‘facts’ available.

Upside of the News

Nospetco, Facts now Publicly Available:

Company Name: Nospetco Oil and Gas Limited
Managing Director: Alhaji Siddiq Manga
Logistics Manager: Mr. Mohammed Hafisu
Industrial Sales Manager: Mr. Abubakar Mohammed
Recent Major Contract Agreement: Supply of 1 million metric tones of Low pour fuel Oil (LPFO) to Benue Cement Company (BCC) Plc.
Contract in the Pipeline: Discussions have been opened for supply of large volume of diesel to Obajana Cement (Kogi State) and Ashaka Cement Company (Gombe State).
Recent Acquisition: 150 branded trucks for delivery of petroleum products.
Other Plans in the Pipeline: To Invest N3.5billion on the manufacturing of world class lubricants in Nigeria.
Brands (of Standard Lubricants) Undergoing Registration/Certification at the Federal Ministry of Commerce and Standard Organization of Nigeria: Nospet VHP 20W-50, Nospet SAE 40 Fieldspar HD40, Nospelube 80W-90, Nospexa3 and Indugear 320.
Miscellaneous: 50 trucks have been set aside for the purpose of completing the supply contract on time. This is needed as a boost to encourage the management of BCC to grant approval for the supply of additional volumes of LPFO to its plant located in Gboko.

So these are the ‘facts’ glean able from the article presented in the May 21st edition of Financial Standard. The upside is that Financial Standard described the company as an “emerging major petroleum marketing company”, and Alhaji Manga beat his chest in pride as he made the following statement: “Before now, activities in the downstream sector were dominated by the majors but the enabling environment and deregulation policy put in place has made us today to become the envy of major marketing companies especially in the distribution of diesel to industries and acquisition of their retail outlets to improve distribution of petroleum products to end users nationwide.”

That is a fantastic statement to make in the face of all the controversy. However, the downside is that Nospetco is conspicuously described as a limited liability company. If this was the only downside, a lot of people will ignore it and go about normal business. But Stocks watch magazine does not seem to have finished with Nospetco yet.

Downside of the News

In an article of the May 27th edition of Stocks watch magazine, writer; Adebayo Obajemu, strikes a different pose on the stance of the new finance houses, Nospetco inclusive.
Describing them in the light of the fraud laden finance houses of the 1990s, he reiterated the Central Bank’s discussion with the regulatory agencies – Securities and Exchange Commission and the Nigeria Stock Exchange, and its subsequent recruiting of the Economic and Financial Crimes Commission to investigate the illegal activities of these finance houses. Stating Treasure Interlinks, Treasure links, Wealth Spinners, Wealth Solution, Antonio Oil, Fort Laurel Silver Links, Spring of Wealth, GFS as examples, he further described Nospetco as the most magnificent and most patronized of them all. Disclosing that some of these companies wear sophisticated facades of respectable businesses such as; magnificent office, state of the art cars, certificate of incorporation and a sizable amount of clients, he went on to make his most vital point of all; none of them has the effrontery to openly display SEC’s approval!
He concluded by saying EFCC is still probing these finance houses, and that it is generally believed that their operations are illegal since majority of them are not registered to do the type of business they are doing.

Reading both sides of the coin, it becomes increasingly difficult to discern what is actually going on. However, on closer analysis one realizes that the evidence before us does not agree. While one talks about the growing prominence of Nospetco, the Oil and Gas limited liability company, the other decries the existence of Nospetco, the illegal finance house. These are obviously very different businesses. This raises an eyebrow. Are these two different companies? Or is this one company operating in different capacities to different participants of a multifaceted society? In a notoriously unpredictable country like ours, a future forecast of happenings acquires a clout of quintessential difficulty. We can only hope EFCC clears the mist.
One thing is for sure if/when Nospetco (either finance house or Oil and Gas Ltd.) goes publicly legit in its modus operandi and profit distribution; it is bye-bye to humongous profits. Unless, of cause, by the unprecedented intervention of providence.



Nospetco Update: Financial Standard, Monday July 2, 2007, pg18

The Managing Director of Nospetco Oil and Gas Limited, Alhaji Siddiq Manga, has publicly denied the company's involvement in the collection of deposit from the general public. He vivified the fact that the company only operates joint venture schemes. In his words, "We do not canvass for investment and neither do we operate accounts, our funding scheme is mainly likened to the JV arrangements of the NNPC, Chevron and Shell among others"
This came on the heels of his revealing that Nospetco Oil and Gas Ltd had acquired petrol stations in Alagbado, Ikorodu and Ibadan. Further he revealed some of his customers which include; Seven-Up Plc and Dunlop Plc. stating that the company has resumed the distribution of liquefied petroleum gas (LPG) from its gas plant purchased from Fadilad Gas located in Oluyole Industrial.
Amongst other things, this revelation has shed light on some grey areas:

1. Nospetco Oil and Gas ltd is not Nospetco the finance house. (at least as publicly declared by the M.D)
2. Nospetco Oil and Gas ltd does not get its funds from public deposit.
3. Nospetco the finance house is still shady and in the shadows and is definitely not to be trusted (at least for now).



Recommended Reading

NOSPETCO! by Dipo Tepede

Nospetco: Trumpeted on the Aegis of Lack of Electricity

Further Examples of Technical Investing in the Nigerian Stock Market

As a follow up to my last article, Examples of Technical Investing in the Nigerian Stock Market; Utilising the EPS of a Company, I thought it necessary to give a sounder foundation of the ideas represented in it. So here are a few more examples to boost your investing knowledge pending a more thorough research on your part.

1. Proposed Public Offer/Right Issue

When news gets to the investing public that there is going to be public offer or right issue for a particular company, the price usually adjusts upwards for various reasons. Some of these I'll share with adequate historical events to buttress my point.

a. The company offering the stocks might use its financial muscle to affect the demand and supply of the stock thus causing "artificial" scarcity with a consequent effect of a positive price adjustment. How do they do this, you may ask. Well, the company sends representatives to the floor of the exchange and buys up most all (if not all) of their available shares on the floor. This is usually called mopping. Mopping is a process of increasing demand which supply may not be able to meet, driving up the price eventually. Remember the case of UBA public offer? Many market analysts where of the opinion that a subsidiary of the company mopped up their shares to drive it to the point of N37.99 where it was suspended technically. Again you might wonder why they do this. The reason is; they want to be able to tell the public that their offer is selling at a discount while still maximising their income! UBA eventually sold at N34 for the right issue and N35 for the public offer. A discount you might say, but is it really?

b. Also the increase in demand of a stock relative to supply and the consequent price rally could be as a result of investors getting in on the stock in order to take advantage of a relatively cheap right issue.
So how do these affect technical investing on the Nigerian Stock Exchange? By joining the "bandwagon" (the "herd"), a speculator can take advantage of the price increase and make some money on the positive percentage increase. But in this case, speculative investing should be done very wisely because one cannot tell for sure when a technical suspension will be put on the stock to give room for the public offer/right issue.
For further research please consider, Access Bank plc and First Bank plc.

2. Positive News that Indicates a Possibility of Good Returns

There is really no specific example of "positive news". It is anything that might indicate a rise in profit for the organisation in question. With this in mind many examples have availed themselves in the past months on the Nigerian Stock Exchange.
Do you recall the rise in price of Dunlop to an all time high of N8.94 when the possibility of a monopoly on the exit of Michelin came up earlier in the year? Or the price rally of FCMB and Costain on the news of new core investors (Helios Investment Partners and Shoreline respectively)? Or the unprecedented movement of Tripple Gee on the CBN annoucement that it is to be the only indigenous company to print cheques? Consider also the astronomical rally of National Salt (NASCON) on the news of its merger with Dangote Salt.
As you can see positive news come in various forms and are usually the most frequent and most volatile form of technical investing available. Speculators can take advantage of this by putting their ears to the ground, e.g. by browsing the internet and reading financial papers, to get a hint of what is happening to these institutions at any point in time. It will amaze you the amount of money you could have made if you had ordered your stockbroker to buy Costain just after reading of its takeover by Shoreline in the Punch.

3. Introduction of a New Product

The introduction of a new product could also mean an increase in stock price of the manufacturer if the product has the potentials of beating available competition in the open market. A very good example is the share price of GlaxoSmithKline (GSK) on the re-introduction of Macleans toothpaste. As a personal assignment you could also research the price rally of May & Baker on the introduction of Mimee Noodles.

4. A Suspected Bonus Issue.

May be you need to be reminded that the way
things work in the Nigerian market is that when a bonus is issued even by a dead
company, the price responds positively. Besides, price response is also directly
proportional to the ratio of the bonus being issued. Abayomi
Obabolujo, Chief Research Officer, Stocks Watch.

In an earlier article, in an attempt to define technical investing, it was noted that emotions/sentiments of the investors drive the stock market an any point in time. It was amazing to see WAPCO (West African Portland Cement Company) reach an altitude of N80.00 based solely on the rumour of a 1:1 bonus issue (of course it was just a rumour and the price crashed soon after this was realised). This was a typical illustration of sentiments driving price. Investors where demanding the stock based on what they heard without bothering to check the financials of the company to see if it could fund such a scrip issue. Anyway this was just one of the usual anomalies of the Nigerian Stock Exchange. What happens more often is a true bonus issue. Take the example of Nestle surpassing the N300 mark (N347.14) on the news of a 1:4 bonus issue also take Guaranty Trust Bank plc hitting N37.89 on the news of a 1:4 bonus issue. We really should not forget Ashaka Cement present price of over N70.00 in anticipation of a 1:4 bonus issue. Even more important is NAHCO's ridiculous price of over N70.00 on the annoucement of a scrip issue of 3:2. It is pertinent to note that Coretrust & Investment Limited considers NAHCO overpriced with an intrinsic value -77.73%. Meristem securities has also termed NAHCO a sell stock at its present price of over N70.00.

I always advise a detailed research before any investment is made in any company at all. And it will do good to always remember Peter Lynch's advice; ...ultimately, it is earnings that drive a company's stock price.
Happy researching.

This essay is written for educational purposes only. Please do your research before investing.
Awaken the EntrepreNoir Within. Promoting financial literacy one article at a time.

Examples of Technical Investing in the Nigerian Stock Market: Utilizing the EPS of A Company

Corporate earnings drive the market. It’s that simple. While short-term
factors, such as the influx of money into the market, or even shocking or tragic
events, can have an effect over the short term, ultimately, it is earnings that
drive a company’s stock price. Understanding this fundamental principle can help
you make long term investment decisions. Peter Lynch, The Fundamentals of
Investing.

Although we are about to talk on technical investing (also called speculation), I still used the above quote to make a point. The point is: in the long run those who invest in the long term do better in average percentage terms than those who speculate (unless you control a huge amount of funds AND can pull off a coup like Soros did). Usually it is not as straight forward as that, but I seem to follow a simple rule; if you have a lot of money to invest, invest fundamentally (In the long term). But if what you have is relatively small, horn your speculating skills.
Truth is; it is a lot easier to speculate in the Nigerian Stock Exchange than many other places in the world. Nigerians are very emotional people, and when it comes to money, they are hysterical! Buying cheap and selling astronomically is very common on the NSE.

I leave the reader to determine what a lot of money is and what it’s not. Like I said earlier, it is a relative thing.

1. Impressive Quarterly Earnings Relative to Current Price

The earnings per share (EPS) of a company is a derived figure that plays a very important role when speculating in the Nigerian Stock Exchange. Indeed, a lot of people have made money just by paying attention to this figure alone. Some Nigerian stock “specialists”, such as Hope Eno, even consider the EPS of a company the fundamental basis of speculating. Though the EPS of a company does not paint the entire picture of the company’s financials, over half of the time it gives an approximate guide; just enough to speculate at least in the Nigerian Stock Exchange for now. However, it is worthy to note that knowing the present earnings per share is NO substitute for indebt perusal of a company’s financials which gives a broader margin of safety.

Comparative Analysis: Over time, experience has taught me that for greater percentages of the time, prices compete on the NSE by comparative analysis. What this simply means is that; in speculating the movement of a share price, one usually just needs to compare derived figures such as the EPS with that of other companies preferably in the same industry. An example would be more illustrative:

Earlier in the year (February 4) I was running through the stock listing page in Stocks Watch magazine when I noticed an amazing difference in price between Ekocorp and Evans Medical. Ekocorp was selling at N1.92 while Evans Medical was at N6.83; a whooping 256% difference. Now this is the shocker: they had the same third quarter earnings at 0.34! This was a no-brainer! Any one can predict that the share price of Ekocorp will eventually try a match up with Evans Medical, all other things been equal. Although this is not always the case, it turned out to be true. Ekocorp went on up to sell at an all time high of N6.78 and by the week ended April 27, it sold at N6.11!

Is it really that Simple? In the NSE it could be that simple save for a little more watchfulness. In the example above, it would pay a little better if you knew what was driving the price of the reference company, in this case, Evans Medical. If there are no positive news (to be discussed later) that might have caused an increased interest in the stock of Evans Medical that would increase demand and subsequently drive the price, you might have found yourself a winner as was the case above.

How to Calculate the EPS of A Company: The calculation of the EPS of a company is pretty easy. It is given simply as:

PAT
------------------- (divided by) --------------------
Total Number of shares held by shareholders

Where PAT = Profit After Tax

Therefore, for a company like Dangote Sugar Refinery Plc, whose annual report I have in my hands now, with a Profit after tax of N16,657,066,000 and total number of shares held by shareholders of 10,000,000,000, its EPS is simply given by:

EPS = 16,657,066,000 = 1.67 (approximately)
-------- (divided by) --------
10,000,000,000

Where to Find Already Calculated EPS of A Company: Most business papers give the EPS along side the company name on their stock list page notably; Financial Standard and Stocks Watch. So you could just pick one up and check it out.

Advantages of Learning to Use the EPS of A Company

1. It gives you an idea of when to get in and when to get out. E.g. in my example above, Ekocorp didn’t go up 256% in an unbroken run, occasionally it fell short of expectation before moving up again. However with the price of Evans Medical to guide you, you could sleep easy knowing it hasn’t achieved its full potential. Note that it is always better to sell (speculatively/technically) before the stock achieves its “full potential.” This is because at that point a lot of other speculators will like to sell too. This causes a glut, excess supply, thus driving down the price.

2. With results being released quarterly and various companies having different year ends, the opportunities for positive speculation are bountiful.
Knowledge of both the EPS and year ends of various companies provides a powerful tool for the speculator in the Nigerian Stock Exchange. In the corporate world, companies have the liberty to choose their year ends e.g. Wema bank plc has its in March, Guinness has its in June and PZ industries has its in May. Hold that in mind. Quarterly results are results released every quarter i.e. every 3months (a quarter of 12months/1year). Thus the random year ends of various companies means results (thus EPS) are released almost every month. This creates a dynamic market for speculators (read opportunities).

3. After the release of the 1st and 2nd quarter results of a company, the EPS gives you the opportunity to take position in the medium term if the outlook gives a good sign. An example will be more illustrative: Recently UBA released its 2nd quarter results and the EPS was derived to be N1.20 (its share price is held at N37.99). Now, Zenith with a 3rd quarter EPS of N1.64 is selling at over N45.00. (Does this give an idea of where UBA will be in coming months?). UBA needs to add an EPS of 0.44 to its present N1.20 to match up Zenith in earnings. You can BET* UBA will do better than that. Considering its 1st quarter EPS of N0.63, 0.44 is a piece of cake under present circumstances. So if it’s going to match up in earnings then why not in price?

As an exercise consider the 3rd EPS of Intercontinental Bank Plc against that of Guaranty Trust Bank at this date. What do you find?

4. You could tell when the company is overpriced.
Yes, by comparing the price of a company against that of other companies with similar EPS, you could get an idea of when the company is busting the “Price fabric” at the seams. In clear terms; when the company’s price is over that of its peers.

Interested in knowing more about EPS and related ratios? You could begin your research by reading the articles in the EntrepreNoir’s Library. Remember the bottom line given by Peter Lynch: … ultimately, it is earnings that drive a company’s stock price.


The BET* here shows a certain degree of risk. Invest at your discretion. Every thing written here is for educational purposes only. The writer will take no responsibility for loss of resources as a result of the utilization of the information on this page

Awaken the EntrepreNoir Within; promoting financial literacy one article at a time.

Nigeria: How to Identify Fake Finance Houses

How do you explain investing in a firm that is not properly licensed by the
Securities and Exchange Commission and yet offers you ridiculous returns in
stocks such that not even the best and he biggest licensed stock broking firm
can ever think of making talk less of offering you? Abayomi Obabolujo, CRO,
Stocks Watch Magazine.

I got really excited when I read the April 29, 2007 edition of Stocks Watch. The Chief Research Officer of the reputable stocks magazine, Abayomi Obabolujo, wrote an enlightening essay on how to identify fake finance houses. What really got me going was that most of the points he made seemed to correlate with what I highlighted in my write-up NOSPETCO: Trumpeted on the Aegis of Lack of Electricity. The message he was trying to pass across is so important, I have decided to replicate it here. Brace yourself; you are in danger of being a little more financial literate!

Excerpts from the essay; the real meaning of investment-II: Identifying Fake Finance Houses by Abayomi Obabolujo, CRO, Stocks Watch magazine

The System:

To my mind, the system to which your fund is being sent to create more of itself should be plain and simple to understand and not a kind of abracadabra that people and firms say they do to generate the kind of interests they offer. For example, when you give your money to a stock broker for investment purposes, you sure know it is for the stock of a specific company, whose business is well defined and proven. If your fund/deposit is in a bank, we all know what they do, including round tripping (when it was fashionable) and the excess charges, import and corporate financing and all the rest but how do you explain giving your money to an institution or someone who says he is into oil and gas without a proper license and yet offers you unimaginable returns that no legal petroleum marketing company can offer. Similarly, how do you explain investing in a firm that is not properly licensed by the Securities and Exchange Commission and yet offers you ridiculous returns in stocks such that not even the best and he biggest licensed stock broking firm can ever think of making talk less of offering you? You see, you must come to certain realities or else you will continue to expose yourself to dupes.

Please take this warning- don’t ever let the desire for highest possible returns in the shortest possible period blindfold your ability to think right. There is no well meaning institution that will ever offer you too high a rate because professionally, they do understand the risk element that is often associated with businesses in a place like Nigeria and would also want to guard against unfulfilled promises. More so, all business owners and institutions are by nature selfish – they want to offer you lower rates to get more. It is not in their character to offer you more and get little for themselves in profit. Let me share with you the Business module or mode of operations of a typical fake finance house.

INCORPORATION:

In Nigeria of today, incorporation is easy; all it takes is a business name, a lawyer or accountant and some naira. With time, your company is up for business; therefore, conspicuous display of certificates of incorporation does not authenticate anything and one of the ways to identify a fake finance house is by requesting to see beyond the certificate, specifically their memo and article of association. If they ever make this available to you, consider their share capital; if you see that it is much lower than how much you intend to invest with them, please check it, they may be fake. If a child must be tall, they say in my village, the legs must be thin, so also a company that must access multiples of millions of naira as deposit from Nigerians must in itself be able to boast of a correspondingly high amount. Can you imagine some of these so-called finance houses have less than N2million share capital, which shows that they never spent much in putting the whole thing together. Please check very well; many of them may just have registered a business name and not even a limited liability company. The importance of share capital in the life of an organization cannot be overemphasized. That was what necessitated the recent recapitalization in the banking, insurance and stock broking firms; for whoever should manage your funds should himself have enough of his to manage. Take the time also to look at the nature of business as stated in the MEMAT. You will clearly see that those things stated there are nothing more than mere jargons.
Still talking about incorporation, please take note of the day and year that your wonder finance company was incorporated and request to see their accounts – management or audited; also ask them if they have done any remittance as tax or such to anywhere. This is not very likely. If you could go this far at your verifications, I believe that at this juncture, the operators of such a finance company would have lost interest in you whatever the seeming size of your deposit. May I ask; why do you think banks and legal finance companies do make copies of their financials to hang in their offices and sometimes in their presentations? It is not for a show; it is because such documents carry big messages; please note this. Look beyond the certificate of incorporation in the glass at that reception, all that are glazed are not so valuable.

Nature of Business:

Operators of illegal finance houses pretend to be involved in oil and gas, stock market, export and import businesses and sometimes, properties among others. Often times, you really would see shadow evidence of that which they claim to be involved in like a few trucks for those that say they are involved in oil and gas, a couple of shares by those who claim to operate in the stock market and such things here and there but if you think very well, you will simply discover the lies in them. If you do oil and gas so much that you make so much such that could afford you to offer ridiculous rates by which reason you have successfully gathered so much money from undiscerning members of the public, then you must be a major operator and at that, you must be visible in that industry by your filling stations, trucks and such. You should also be bold to present the names of your major clients or patrons for verification. If a company operates big without assets that can easily identify them, then something is amiss. It does mean that your business in itself is illegal, a faceless kind of business. My friend, we know the major and independent marketers of oil and gas products in the country. Let someone stop deceiving you just to get your money. Don’t tell me that these people are into bunkering for such does exist in Nigeria only as illegal business and I do not see the reason as to why you must deposit your funds with someone to carry out such a nefarious activity as bunkering that you know cannot last forever; In any case can you call such a deposit an investment? No, it is an advanced level of gambling. In the stock market, we know those that are real market operators; please don’t fall prey into the hand of a charlatan who calls himself a fund manager.

Let me quickly add this comment before rounding off for this week. The length of time a system has worked does not invalidate the fact that it is a fake and dubious venture. If I may remind you, Omana, Omana did not fail in his obligations to his clients up till the time he was arrested by the regulatory authorities for operating an illegal finance house. How did he do it and how are they doing it today, can’t you think? As of today, to access funds for a legal business from banks is one of the easiest things; the rates are also low enough. Why can’t these guys approach the bank to access facilities at 25% per annum instead of offering you 120% and in some cases, 360% per annum for your own funds?

culled from Stocks Watch (April 29)

Understanding Technical Investing as it Relates to the Nigerian Stock Exchange

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

Definition of Technical Investing

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

Methods of a Technical Investor

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

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

Reasons for Stock Price Fluctuation

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

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

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

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

Why Investing is risky to the Average Investor

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

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

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

Invest Wisely, Invest in Financial Education

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

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

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


Recommended Reading

Guide to Investing by Robert Kiyosaki

Investing Wrongly in the Nigerian Stock Market: A Worrying Trend

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

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

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

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

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


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

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