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.