Lessons From Our Last Nigerian Stock Market Fiasco
Posted on | November 14, 2009 | 4 Comments
The crash of prices of stocks in the Nigerian stock market, and globally is no longer news. Stock markets go through cycles of boom and bust, ups and downs, and once in a while a tsunami the type we just witnessed. It comes with the terrain, and it is not new to thoroughbred investors.
There are two main group of players in any stock market – investors and traders.
Investors do not buy shares, they buy into companies. Before they take a position, they check out the company the way a man (hopefully) checks out his prospective bride, tokunbo car or property before committing his heart or money. Since he becomes a part owner of the company, attends their annual general meetings, makes his voice heard and one day rises to become a director, he chooses with care. He wants to know what the company does, how they operate, their target market, current management, future outlook, financials and earnings ratios etc. In summary, he does his due diligence before calling his broker and reaching for his cheque book
A trader is just that, someone who buys low and sells high for a profit. He is a passer by. He does not care what the company produces, who constitutes the board and management, the companies financials and earnings ratios, the state of affairs in the company (what concerns agbero with overload?). As a matter of fact, he does not care if the company is still producing, have run out of raw materials or the workers are perpetually on strike. Some traders do not even know where the company is located. All he cares about is if the stock is bullish and if the answer is yes, then he is in business. He buys, checks the papers everyday for stock price movement (hopefully upwards), prays and hopes for the best.
Although the recommended method of entering the market is as an investor, there is nothing wrong with after having thoroughly learned the ropes, to put on a traders cap and make a quick kill.
The group that took that hardest hit (got slaughtered) in the last stock market crash are the rookie traders, everyday folks heard the rumour of the boom in the market and joined the herd to rush in at the tail end of the bull run. As investors switched to trading gear, taking profits and exiting the market, traders were rushing in to take their position. As the dust settles, the investors are picking back their stocks at bargain prices.
A lot of folks have vowed never again will they have anything to do with the stock market, and for stocks still in their name, they are waiting for a mini market recovery before they make a final run for dear life. This seems to be the sentiment of the majority (rookie traders that joined the gold rush), and has affected full market recovering as there is a rush to take profits at the slightest sign of market recovery, those sending the index into a yoyo spin.
There are lessons to learn from the last wholesale slaughter of rookie traders that took place in the stock market. Failure or setbacks hurt, and if the price of a lesson seems too high, there is a temptation to through away the lesson, and go make a fresh mistake somewhere else (start all over again).
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For folks that are still hurting from their recent misadventure in the stock market and others, these lessons are extremely important for whatever investment option you may consider in future. The principles of investment holds generally, and you flout it, you will be sorry. A lot of folks have taken shelter in the real estate market. Their assumption is that real estate prices always go up. That has been the experience thus far in Nigeria. That is about to change, as Nigeria can not become insulated forever from world economic forces. The mafia that controls land prices in Lagos and other cities can only continue to hold sway when there is a steady stream of willing buyers with cash. The moment the cash flow starts drying up, the mafia will simply have to keep the land to themselves, or submit to the law of demand and supply.
The lessons are many, but I will be looking at these for a start:
1) Invest in your education before you commit your money
2) Start small and test your wings before you attempt to fly
3) Do not rely on your broker and analyst/advisor – do your own due diligence
4) Know when to enter, when to stay and when to run – Have an exit strategy
5) Have control over your investment – do not be victim of market forces
6) Your investment should make sense when you buy, not when you sell
7) Become a selling shareholder – the ultimate investor
8.) More topics to come
I will be taking the topics one by one in the coming days
For the present, begin to take the drivers seat of your financial future
Tara
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Related posts:
- Nigerian Stock Market: Is it Time to Return?
- Do Your Own Due Diligence
- Become a Selling Shareholder – The Ultimate Investor
- Have Control Over Your Investment
- Your Investment Should Make Sense When You Buy, Not When You Sell
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