Eze Nwagbaraji
27 October 2008
analysis
Individual investors are the engine of every capitalist system and the anchors of any meaningful democracy.
Our capitalist market system functions best when individual actors, exercising their economic intelligence drive investments in pursuit of profits.The sole reason for being in the market as an individual investor is to make profit, i.e. to derive high returns that are not otherwise available through other investment vehicles. But the market is a volatile place and stock prices often move without regard for the quality of the underlying business in the short term.
Empirical evidence from older and more advanced markets such as the US, United Kingdom, Canada, etc. lead one to conclusively state that some of the best stable and large capitalized corporations today began as small and sometimes micro cap companies. Small and micro cap companies tend to be extremely volatile. Because of this, their percentage stock price movements tend to be wide and may sometimes appear unbearable to some individual investors.
Noise in the market place affect the price of small corporations at a higher percentage than for well capitalized corporations. 2008 has emerged as a very punitive year for the price of equities across all markets. In Nigeria, leading corporations such as UBA, Intercontinental Bank, Fidelity, Transcorp etc. have seen their share prices shaved significantly down.
In the United States, the third quarter has been brutal in the equity market. American International Group (AIG), the world's largest insurance company has been seized by the US government for fear that it may plunge the entire market into deeper crisis, Washington Mutual, America's largest Savings & Loan institution has been taken into receivership by the Federal Deposit Insurance Corporation (FDIC) and its assets and deposits sold to JP Morgan.
Lehman Brothers, a 150 year old investment behemoth is in bankruptcy, Wachovia Bank, another top 10 bank in the US was on September 29, 2008 forced out of existence by the FDIC with its retail banking assets sold to Citigroup, etc. In the UK several corporations have seen their share prices shaved downward including BP, one of the world's largest oil refiner, other European countries are experiencing similar problems with equity markets influx.
Volatile markets are the individual investor's best openings to increase wealth. The individual investor who is investing for retirement year responsibilities should never be bogged down by seasonal shifts in market sentiments. What happened in the United States in the last 10 days of September 2008 represented a rare opportunity for an individual investor to move in and increase his holding of some of the best corporations on earth.
Leading Nigerian corporations are trading at a fraction of their 52 week highs. A volatile market creates unpredictable environment for the casual market participant. There are many casual market participants in the market. As several of them rushed to get out of the gate in the market, the seasoned individual investor who has done his home work sees an opportunity to enter the market with relative ease.
There is nothing wrong with General Electric, Microsoft, UBA, Intercontinental Bank, Dangote Cement, Proctor & Gamble, 3M, and the utility companies that power electricity across the United States, etc. These corporations tend to enjoy stable share prices, except where herd mentality sets in and their stock prices move without significant shifts in their operational and market fundamentals. If any of these corporations constitute part of your core holding in your portfolio, it will be full hardy to shun an opportunity to add to your holding.
As a long term investor, the individual investor should be fully aware of the cost of each share. Dividend payment should be measured as a percentage of the stock price. If a share is acquired at N50.00 and the annual dividend is two percent, it makes good investment sense to increase the number of shares held if the share price declines to N30.00 unless there are changes in the corporation's underlying fundamentals.
On Monday, September 22, 2008, the US Treasury and market regulatory authorities granted Goldman Sachs and Morgan Stanley, the two investment bank survivors of the current market carnage in the country rights to become bank holding companies. Within hours of the announcement, Warren Buffet, the world's most successful investor, pumped in $10 billion dollars into Goldman Sachs ($5 billion in preferred stocks and $5 billion in warrants to acquire ordinary shares within five years at $115 per share). Goldman Sachs hit a 52 week high on October 31, 2007 at $250.70 per share. On September 18, 2008 the share had dropped to $86.31 due to market volatility. Goldman Sachs as an Investment Bank was not affected by the mortgage backed security instruments crisis in the US markets.
Goldman had sold all its mortgage backed securities more than six months before other holders of the instruments realized that they were holding contaminated or toxic instruments that may be worth less than face value.
Few days before the Goldman deal, Warren Buffet struck a deal and paid $4.5 billion to acquire Constellation Energy, one of the largest suppliers of electricity and fossil fuels in North Eastern United States. On January 8, 2008, Constellation's market capitalization was $19.25 billion. Its share price on this date was $197.97, but had fallen to $13.00 on September 16, 2008.
Constellation Energy was founded in Baltimore, Maryland in 1906. On October 2, 2008, sensing unparalleled opportunity in the banking industry, Wells Fargo & Company bid $15 billion to acquire Wachovia Bank, offering to acquire the bank with its own stocks and cash without FDIC assistance. Berkshire Hathaway, Inc., (Warren Buffet's investment vehicle) own 9 percent of Wells Fargo and is the bank's largest institutional investor.
The long term investor has a lot to learn from the conduct of Wells Fargo & Company. It saw an opportunity in the acquisition of Wachovia Bank. Citigroup and Wachovia had already reached a deal few days earlier with the assistance and express support of the FDIC (the US Bank regulator and customers deposit insurer). Wells Fargo took the calculated risk of being sued for interfering in contractual rights by Citigroup and made an offer to acquire Wachovia at a higher price rather than sit on the side lines and allow the acquisition by a rival bank. (Citigroup has since slammed Wells Fargo with a $60 billion lawsuit). Whoever acquires Wachovia will emerge as the largest commercial bank in the United States with more than $1.4 trillion in customer deposits.
On September 29, 2008 when Citigroup bid to acquire Wachovia Bank, the company's share had dropped to $0.75 with a market capitalization of $150 million. Wachovia's 52 week high was $52.25 per share reached on October 5, 2007 with market capitalization of $112 billion. October 2, 2008 saw Mr. Buffet inking another deal. He put up $3 billion to acquire GE preferred stocks that will return 10 percent with another $3 billion in warrants for ordinary shares of GE.
Taking a queue from investors and leading corporations who use market volatilities to solidify their hold in the market place and increase their market or industry positions, the individual investor should always strive to understand the working of the market. Unquestionably, Warren Buffet is betting that Goldman Sachs with the new authority to become a bank holding company will use its intellectual properties and abilities to understand global banking to acquire regional banks in the US and increase shareholder returns.
As a long term investor, the individual investor should never be influenced by TV and Radio commentaries. These avenues of mass communications are interested in audience views and ratings. No TV or Radio commentary can provide sufficient information on the fundamentals that underlie any market.
News clips and headline blurs are meant to catch public interest, not provide comprehensive information of market realities. Making decisions to acquire or sell stocks based on the latest updates from the media is a losing strategy. When an individual investor takes a long-term view of investing, volatility shouldn't be as much a concern. If you're focused on the fundamentals of the corporations that are part of your portfolio, even harrowing market drops won't ruffle your feathers. Over the long-run the ups and downs tend to smooth out into an upward trajectory.
The media headlines that emerge during market volatilities are overwhelming, especially where these volatilities are across global markets. It is important for the individual investor to understand that there has never been any time in history that we live in a more unified world. The internet and its associated technologies have reduced information to its lowest common denominator.
Trans-continental investments are part of the 21st century realities. Nigerian corporations are increasingly becoming global operators. Intercontinental Bank, a Nigerian Bank for example has acquired a global posture. Recently, it acquired the right to brand London's Heathrow Airport. It is aggressively pursuing banking businesses in the UK as much as in Nigeria.
ABC Transport is not just a company moving people in luxury buses across Nigeria, it is also involved in shipping and freight businesses in other African countries. The same case holds for UBA, Fidelity, etc. The individual investor must be focused and dispassionate and make only solid strategic portfolio adjustments.
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