By Sola Oni
Investment in any asset class is a tradeoff of risk and return. It is settled in portfolio management that there are four major asset classes- cash and cash equivalents, equities, fixed income, and real estate. Apart from what is called systematic or undiversifiable risk, which is inherent to the entire market or market segment, each asset class has its peculiar risk. Risk appetite largely determines whether one is an investor, speculator,or a gambler.
An invstor can be an individual or a corporate entity that commits money into a business with expectation of good return on in form of capital gains, interest, dividend, premium, other pension benefits etc on consistent basis. A smart investor works closely with a professional adviser to minimize risk and maximize return. A speculator invests in risky assets with eyes on a huge profit. But he does this with calculated risk.
The Art of the Gamble
A gambler puts money on a highly risky investment with the expectation of extraordinary profit. A gambler is ready to lose his entire money or other asset in expectation of unrealistic returns. Investments that fall under gambling include casino, lotteries, race horse betting, card games and bingo.
Some people, either for lack of knowledge or deliberate mischief classify investment in stocks as gambling. This is incorrect. Many investors have gotten their fingers burnt for different reasons, including failure to seek investment advice from a stockbroker, buying shares without investment objectives, a lack of knowledge of investment time horizons, poor knowledge of a company’s operations, weak corporate governance structure and competitive edge, failure to understand risk profiles, investing short-term inlong-term assets, called a mismatch. Problems also arise because of investments based on herd instinct, just because several people buy a specific stock does not mean that such a stock is a good investment. Another challenge is the misplaced ambition to get rich quick, investment assets are not quickly prepared plates of noodles.
Buying Assets by Framing the Right Questions
There are questions that an investor cannot ignore when investing in shares. Those that bet on casino games and ponzi schemes rely on ambitious expectations, designed to attract the unsuspecting and naive individual.
Why would an investor want to be a shareholder in a bluechip quoted company without information on its size, and fundamentals such as its price-to-earnings ratio, debt-to-equity ratio and book-to-market value? Investors need to know a company’s stock performance compared to its peers, shareholder pattern, any mutual fund holding, dividend history, revenue growth, volatility record and the extent to which external shocks such as political unrest, economic dislocation, unfavourable government policy, a pandemic, energy crisis and a host of other situations could have adverse consequences for the company’s net sales and profit.
Meeting the Equity Doctor
Market knowledge depository is where securities professionals commonly called stockbrokers become gatekeepers. These professionals keep tab on all the sectors of the economy. They do many analyses before recommending buy, sell or hold to an investor. Stockbrokers are not God. A sudden occurrence can negate their analysis, but they encourage their clients to diversify holdings as a hedge against unforeseen risks. The processes and procedures for investment in shares show that it is not gambling. It is an investment with calculated risks and there are mitigants. Anyone who loses his life savings to investment in shares must have breached the due process of investing or duped by a cone man.
Avoiding Snake Oil Merchants
Certified stockbrokers and the companies they work for are highly regulated by the Nigerian Securities and Exchange Commission (SEC), and the Nigerian Exchange Limited (NGX), and can also be sanctioned by the professional bodies such as the Chartered Institute of Stockbrokers (CIS) and the Association of Securities Dealing Houses of Nigeria (ASHON). The list of individuals and corporate members in good standing can be confirmed from these institutions. Investors should contact stockbrokers at every stage of their investment decision.Those who understand the market make money throughout the year whether bearish or bullish.
In Praise of Risk-free?
In corporate finance, the Federal Government Government bond is ranked as the safest and therefore risk-free. This is premised on the fact that it is ‘ backed by the full faith and credit if the government ‘. The perception is that the bonds have no default risk.The income on the bond is exempted from State and local government taxes. The bond is called gilt-edge.
However, the risk-free attributes of a bond is flawed by its associated risks. The bond is not insulated from inflation risk, exchange rate risk, interest rate risk, reinvestment risk, liquidity risk and even default risk. Argentina, Ecuador, Lebanon, Ukraine, and Venezuela had defaulted in sovereign debt at one time or the other after all.
Share prices can fall significantly in a volatile market. Volatility may be prompted by bad news from the company, such as announcement of poor earnings, controversial government policy or any other external events beyond the control of a company. However, share diminution is also a buy signal for companies with strong fundamentals.
Stock markets operate on self-correction, based on certain variables, hence, after a while, the share price will bounce back to its fair market value. But it takes those who understand market psychology to take advantage of occasional price swings. Shareholders suffer credit risk when a company goes under, leading to asset stripping. The law provides that the shareholders can only be considered after taking care of the company’s creditors. There is no investment that is risk-free. But gambling is the riskiest engagment. Gamblers often lose everything, including shirts, wallets and shoes.
Oni, is an Integrated Communications Strategist, Chartered Stockbroker and Commodities Broker. He is the Chief Executive Officer, Sofunix Investment and Communications