Investing in Volatile Times

The Nigerian Stock Exchange (NSE) recently released the July monthly statistics for domestic and foreign participation in equity trading on the NSE. Foreign transactions accounted for 50.7% of trading volume in July which is similar to the 51% recorded in June.

It was quite a revelation reviewing the statistics of transaction volumes from 2007 to date which was contained in the report. Volume of transactions crashed from a high of N4.76 trillion in 2008 to a meager N1.32 trillion in 2012. However, foreign participation has been gradually increasing from a low of 15% in 2007 to a peak of 67% in 2011.

Several insights emerge from the statistics:

1. Nigerian investors who fled the market in 2008 are yet to return. Therefore they did not benefit greatly from the low entry prices between 2009 and 2011.

2. Foreign domination of the market since 2010 has resulted in higher volatility. For example the All Share Index rose 35% between January 2010 and April 2010 peaking at 28,030 and then falling to 22,429 in September. Similar pattern was repeated in 2011 with the Index peaking in January at 27,770 and then collapsing to 19,828 (29% drop) by December which was very close to the nadir of March 2009. This volatility is not surprising given the fickle nature of foreign portfolio speculators. It is therefore very difficult to keep calm in the middle of such volatility. No wonder individual investors stayed away.

3. The Nigerian stock market is no longer insulated from global market trends; a fall out of the global economic crisis. During the crisis, foreign portfolio managers flocked into frontier markets like Nigeria in search of higher yields. A combination of easy money caused by Quantitative Easing (QE) by several Central banks, low returns in developed economies, stable exchange rates and higher returns in countries like Nigeria, encouraged foreign inflow into Nigeria and other similar markets. Therefore, any policy or economic change in developed markets now has a ripple effect in Nigeria as the foreign speculators adjust to the demands of their domestic environment and exit our market if necessary. For example, the recent talk of QE tapering by the US Fed has resulted in gradual sell off of emerging and frontier market equities. The NSE All share Index has dropped 10% since June.

So what do you do as an individual investor in this globalized and volatile market? Here is what I recommend and do:

1. Play the long term game. The market is too volatile for the individual investor to engage in speculative trading that now requires daily monitoring due to the entrance of foreign speculators.

2. Concentrate on quality companies. Stay away from those cheap stocks; they are cheap for a reason. Therefore avoid all those companies trading at less than N1.

3. Invest slowly and consistently; preferably monthly. Do not put a large amount of money all at once into the market to avoid being all in at the top. This is a real risk as there is a tendency to be dragged in when the market is at the top as more people and the papers become more interested. If you have a large amount to invest, split it into 4 or 5 tranches and invest over several weeks. Your average price will thus be lower than the peak price.

Above all, ignore the noise and the daily gyration of individual share prices. Pay close attention only to the business performance (not share price performance) of the companies you hold. Remember, time is a good friend of good companies. Therefore, choose wisely.

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