Make no mistake about it, these capital market outlaws are still within the system. They succeeded in the past but they appear to be against the brick this time.
Investing in any venture, product or service, is a risk. If in doubt ask maverick investor, Warren Buffet, founder of Berkshire Hathaway. Buffett, also known as the Oracle of Omaha, is an American billionaire who has a knack for profiting from Wall Street. He takes the plunge when nobody is watching and in most cases comes out looking good and smelling nice. He’s such a smart dude who knows how to mind his little cents. And yes, he has over time turned a field of cents into a minefield of dollars.
Buffett never ceases to animate and excite. He is the archetypal smart investor who undertakes risks and is never ashamed to share its success or failure. The smart investor practically took a victory lap early in the year after he won a 10-year, $1 million bet with Protege Partners. The bet was that a passively managed index fund could beat the returns on a selection of hedge funds. And he won.
As a practice, Buffett pens a letter every year to shareholders of Berkshire Hathaway Inc. In his last letter for 2018 investing year, he highlighted an important lesson about risk.
Buffett recounted in his letter that he and his counterpart in the bet, Protege Partners, funded the prize by each purchasing in 2007 $500,000 worth of zero-coupon bonds maturing in 10 years. Purchased at a little less than 64 cents on the dollar, the forecast was that the investment would deliver an implied return of 4.56% if held to maturity.
By November 2012, with around five years to go to maturity, the bonds were selling for 95.7% of their face value—an annual yield to maturity of just 0.88%, Buffett noted in his letter.
Meanwhile, in November 2012, the cash return on dividends on the S&P 500 was 2.5% annually, around triple the yield on the U.S. Treasury bond, Buffett said, with the dividend payments almost certain to grow and companies retaining earnings that would be used to expand operations and repurchase shares.
In late 2012, Buffett and Protege agreed to sell the bonds and use the proceeds to buy 11,200 Berkshire “B” shares. As a result, Girls Inc. of Omaha, the charity picked by Buffett to be the beneficiary of the wager, got more than $2.2 million instead of the original $1 million. (In the event Berkshire shares went south, Buffett had pledged to make up the difference between the value of the holding and the original $1 million wager). “Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date. ‘Risk’ is the possibility that this objective won’t be attained,” Buffett wrote.
The lesson from Buffet’s experience as conveyed in his letter is the place of knowledge in risk-taking. Knowledge is key for any investor. It is your knowledge of an industry that ought to govern how you invest.
This is a major challenge in Nigeria’s capital market. Many investors in the nation’s capital market lack
the knowledge that would give them competitive edge. Knowledge determines the type of risk you take, when to take risk and when to stay hedgy. And it is all down to capital market education by the operators.
During the boom years about a decade ago, many Nigerians rushed to the market but not with the requisite knowledge. The market showed signs of sustainability, raising hope. But it was false hope. It even hit an all-time high of N13.5 trillion market capitalization in March 2008. Then hope froze to despair. The stock prices experienced a free-for-all downward slide. Those who borrowed money to invest got stuck in the mud.
This writer lost good money. And so did members of my family and some of my friends. But we were lucky it wasn’t borrowed fund. A banker friend wasn’t that lucky. He borrowed N15m from his bank hoping to invest and sell off in a matter of months. But the bubble burst. He had to work for over one year without salary just to pay back the loan which his bank deducted dutifully from his monthly salary over a period. Such were the huge losses incurred back then.
Today, by hindsight, some of the losses were due to ignorance of investors in the market. Yet other losses were incurred largely due to deliberate mischief of some shady stockbrokers. This category of stockbrokers in full consciousness guided their clients into turbulence either by withholding critical information about the investment from their clients or simply goaded them to invest heavily just to earn fat commission. Endpoint: Unwary investors got their fingers burnt.
That was during the 2007 – 2008 boom era. But make no mistake about it, these capital market outlaws are still within the system. They succeeded in the past but they appear to be against the brick this time.
Recently, members of the Association of Stockbroking Houses of Nigeria (ASHON) met with the management of Securities and Exchange Commission (SEC). The meeting may not mean much to some Nigerians but what the Acting Director General of SEC, Ms Mary Uduk, told members of ASHON deserves critical analysis. The new broom who is undertaking sweeping reforms in the industry did not mince words when she said that SEC would collaborate with associations and persons that were fit and proper to operate in the market. Never take such with a pinch of salt.
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Uduk sure knows there are unfit corporates and persons tainting the market with their unethical activities. As someone who has been part of the sector since 1986, she should know. And she is already doing something about it. She wants more transparency in the system. She demands
integrity as a culture not an accident in the market. For wanting good to happen to investors, she is being vilified by those who profit from the deliberate distortions created in the marketplace. They say in Nigeria when you fight corruption, the bogey fights back.
This is one of those instances in Nigeria where the best man for the job happens to be a woman. Uduk has shown a determination to push through the veil and engender excellence, trust and profitability in the capital market. She is walking the talk and her philosophy fits into the frame of President Buhari’s anti-corruption crusade. She needs encouragement from the Minister of Finance and the Presidency to make good what has gone bad in the system.
After losing so much when the bubble burst about a decade ago, many investors have stayed away, not trusting their brokers and the market itself. Uduk is shoring up the sagged confidence. She is standing up to the hitherto untouchables who undercut the system for illicit profit-making. She should stay the course. But the minister would do well to strengthen her hand by pushing for the confirmation of her appointment. SEC needs a substantive boss at this time.
Buffett once warned: “Never invest in a business you cannot understand.” Ms Uduk’s push for investors’ financial literacy is key at this moment. Nigerians need to know. They need the knowledge to mitigate the risk because as Buffet said, “risk comes from not knowing what you’re doing”.