How investors can profit from the depressed stock market

The market capitalisation of the Nigerian Stock Exchange (NSE) has declined by a total of N2.19 trillion since the beginning of the year, comparing its closing value of N11.004 trillion on Friday, November 7 with the N13.194 trillion it was in January 2014.

Most sectors on the NSE, from banking, to oil and gas, construction, food and beverages have seen stock prices fall below their intrinsic value. The declining share prices clearly offer opportunity for investors to take advantage of low share prices. Unarguably, the best time to buy stocks is when a stock market is in downward trend.

In his book, ‘Market Panic’, Stephen Vines stressed that in periods of sharp market decline “it has been demonstrated that those who bought at the height of the carnage were rewarded for their audacity.”

Stock market panics are always the best time to make money because markets “always overreact; they always correct themselves.”

“Investors who are anxious to offload their shares at the first sign of market weakness are usually the same people who bluntly declare that they will stay away from the market while so much uncertainty persists and when prices seem to be in free fall,” Vine stated.

Basically, the stock markets react to information and events in any economy.

In Nigeria, with the utterances of politicians and the seeming tension in the nation as the 2015 election draws closer, big-time foreign investors who are the largest investors in the Nigerian stock market seem to be exiting the market.

In addition, the end of the United States Federal Reserve $4.5 trillion bond-buying programme, a radical monetary policy introduced six years ago to steer the country’s economy, has also contributed to the exit of foreign investors from the Nigerian stock market.

Similarly, the earnings-constraining policies of the Central Bank of Nigeria, especially the recent move to cut dividend payouts to investors in bank stocks, also have a negative effect on equities listed on the banking sub-sector of the NSE.

Therefore, in order to take advantage of the opportunities offered by the current trend in the stock market, potential investors must take out time to understand what they are investing in before venturing into the market.

They must also adopt a time horizon before investing.

Investors must understand that the stock market is not a casino and should not be looked at from a short-term view.

This is because history has shown that investors who go into the stock market without understanding what it is all about get their fingers burnt.

Most importantly, stock market investors must understand the behaviour of different stocks and sub-sectors on the NSE so that stockbrokers who are always out to get their commission do not mislead them into buying ‘dead’ stocks.

There are specific seasons and dispensation of different stocks and sub-sectors.

The time of the conglomerates was in the 70’s and 80’s and between 2005 and 2009 was largely a period of boom for bank stocks and subsequently, food and beverages, construction, among others.

Many people do make mistake by investing in industries that belong to the past where earnings probability and returns on investment are not visible, even in the long term, such as some insurance stocks on the NSE today.

To this end, Michael Sheimo, in his book, “Stock Market Rules,” warns that, “People should at least spend as much time selecting a stock as they do when buying a new refrigerator.

“The research is extremely important, so that the investor doesn’t just buy the glitzy presentation of a particular business. Select stocks with good-looking fundamentals, reasonable prices and a fast-looking future. Buy the stock and watch the new developments.”

Also Vines noted that value investors, that is, investors that seek out companies with solid earnings records and are prepared to hold the stocks over the long term, are those to benefit most in a period of market down turn.