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Basics
Our Investment attitude

This write-up looks at the

diversion of investments in the
stock market to the housing
sector and how investors have
failed to learn simple lessons.

Jolaolu Fakoya
ACIIN, APRM
7/19/2010
Most times I wonder where fundamentals disappeared to.
In this part of our world, we often fail to understand that
there are fundamentals behind some basic things around us
– finance as in this case.
We leave our financial thoughts unguided and our financial
decisions uncultured.
In this publication, I highlight the irrational behavior of
investors vis-à-vis stock market and the real sector in
Nigeria.
The major problem I see is Greed. When anything is in the
boom, people rush for it blindly. What are the objectives in
investment? Also, the stockbrokers who are supposed to
provide expert investment advice have basically automated
their duties to buy and sell functions. But I must state that
anything that lacks fundamentals must surely plunge. We
are all well aware of prominent examples like the
“Wonderbanks” and “Networking”.
The Stock Market
By definition, risk takers often fail. So do morons. In reality, it is
often difficult to sort them out.
The stock market is another money making centre that
gained its peak popularity some years back. The stock
market is like a double-edged sword in its operations –
although does not necessarily imply a zero-sum game.
The Nigeria Stock market doesn’t work entirely on basic
principles and fundamentals such as law of demand and
supply, risk/reward trade off, and share price valuation.
Instead, the institution is rocked by sharp practices,
deliberate price manipulations for political reasons and all
sorts, there by altering the natural cause of movements.
Banks also swept their credit risk management knowledge
and expertise under the carpet and gave out more loans to
facilitate purchase of over-priced stocks.
Unfortunately, the market crashed. For whatever reason it
crashed, be it domino effect from similar crashes around
the world or as a result of recession, it has returned to
basics. There is a prospect for it to pick up as some
investors believe it is a correction phase, but we should
now be wary that the stock market is not a stream.
However, with the recent surge of properties prices, it is
evident that we are yet to learn our lessons.
Jolaolu is a specialist in Actuarial matters especially in the areas of Pension & Employee Benefits
and Insurance. He is a Member of the Institute of Actuaries, UK
Comments, suggestions and topics are welcomed.
e-mail: jollyfakey@yahoo.com
The Housing sector
Just because the river is quiet doesn’t mean the crocodiles have left
The Housing sector is rocked with inflation. There is also
the unnecessary hype that follows. Property valuation
especially buildings is based on expected income from
rents, good roads, proximity to financial hubs, effective
drainage system and so on.
However, in this part of the world, the prices of these
properties are baseless and lack fundamentals.
The CBN hopes to stimulate the economy back to recovery
and continuously releases policies on demand-side, hence
encouraging spending. Attention has thus shifted to this
sector of the economy.
Demand in this sector is on the rise as more and more
people move into Lagos on a daily basis. When, however,
the city can no longer contain such influx of people,
concentration should shift to other unexplored areas of the
region and its outskirts as it is already predominating in
areas like Mowe, Ibafo, Ikorodu, Meran etc. Given good
road network, these new settlement would extend to Ogun
state, Oyo state and diversification to such areas would
reduce concentration in Lagos and hence push down
demand.
Hence, values of such properties would fall. We would
start to see companies deplete their fixed assets revaluation
reserves, the actual value of mortgages would exceed the
underlying assets, financial institutions would declare non-
performing loans, there would be financial strain and
spending would be cut back and all other domino effects
that would follow.
I am not Paul the Octopus and not predicting another
round of recession but I hope to put a question in your
minds - be you an individual investor, a corporate investor,
or Fund manager, what are your objectives in investing?
Before you invest, endeavor to research, talk to industry
experts and your financial advisers.
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