Speculating or investing?

The illiterate of the 21st century will not be those who cannot read and write, but those who cannot learn, unlearn, and relearn. ALVIN TOFFLER

The flurry of activities in the last few months on the Stock Market is an exciting development. Many companies are attempting to raise billions of naira from the capital market. An IPO and a PO were oversubscribed. The degree of awareness is on the upward drive. Lay folks want to know the difference between POs and IPOs. I have been asked the reason for price difference between rights issue and a public offering. These are positive signs.

In all the publications, advertisements in print and electronic media I came across, there was no warning about the risk involved in stock market investments. Shares prices, as well as the income from them, can go up or down. The past, while helpful, is no guarantee of future performance. The investing public should be warned that they may not get back the amount they invested. Consequently they should only invest in the stock market the money they can afford to lose.

The need for this warning was brought home to me many months ago. Someone who had attended many of my classes (or services) on investments and money matters got his butt fried when the value of his investments nose dived. He became very cynical about me and my teachings. The excitement of investing as a life long discipline evaporated. He had not learnt the basics before he jumped into “practice”. He was yet to learn the difference between investing and speculating. He had not understood how to read the figures and make sense of them. Don't misunderstand me. This fellow was a university graduate and was with a top world class firm. Stock market however was a new area to him. I learnt from this experience that information is not the same thing as knowledge . It reminded me of the dot.com fiasco a few years ago.

I had just read The Millionaire Next Door by Thomas J Stanley and William D. Danko. It fired my investment drive and I began to teach it. It was at this moment that I was transferred to Lagos . So we could not finish “the syllabus” – how to read the figures (profit margins, P/E ratios, ROI etc). The kind of stuff you learn in investment clubs. It was also at this point that many technology companies came into the market. Many things were happening at the same time. Internet had just caught fire. It was much easier to trade with as little as £15 brokerage fee. All one needed to do was log on to the internet. Many amateur investors assumed the status of gurus. Everyone was giving stock tips. Dot.coms (could they have been dot.cons?) reigned supreme. Their s hare prices skyrocketed in a very short period. I know people who borrowed to invest (read speculate).

It was chaotic. Share prices of loss making companies went through the roof simply because they were gaining market share. P/E ratios did not make sense anymore. Analysts contemplated new methods of valuing companies (say on the basis of market shares). Eventually common business and investment sense prevailed. But not before many fingers were burnt (I mean third degree burns)

Nigeria is an emerging market. Our stock market is still very basic but with a high potential. We should aim to create a sophisticated investing public by public enlightenment. The advent of investment clubs is welcome so also is the introduction of trading in derivatives.

Like everything that has a potential to make profit, it carries with it the likelihood of making a loss. This should be made very clear.

Adewale Adefuye (lord@walefuye.com)

Dean of LifeClass