On this blog I preach a lot about investing. It is a habit everyone must inculcate and nurture as route to financial freedom. However, investing can also lead to financial ruin if you make the wrong choices. Here are examples of investment decisions that can lead to financial ruin.
Speculating with Shares
James figured it was time for him to stake his claim as smart investor. This was 2006 and the dawn of the stock market boom in Nigeria. From a starting investment of N1million in 2006, James had grown his investment to N10million by 2007. Ask James how he did it, his simple answer was “follow the money”. He didn’t know what 90% of the companies he invested in did or what their results were. He simply bought their shares by gauging their technicalities and boom it skyrocketed. James had the magic touch well, until the summer of 2008. All hell let loose and he saw his N10m diminish to N6million within a week and to N200k by the end of the year.
Whilst investing in shares is one of the most effective and time tested avenue for long term wealth creation it can also lead to financial destruction if you do not undertake proper financial analysis and understand the company that you plan to buy their shares. Buying shares in a company that has very poor fundamentals because everyone is buying and their share price is rising is like playing a lottery, only that it is worse. With a lottery you spend very little to gain a fortune but with shares you invest your hard earned money expecting a massive gain only to loose most or all of it. Apart from fundamentals, price is also a crucial part of investing in shares. Like renowned investor Charlier Munger would say, it is better to buy a fair company at a good price than a bad company at a fair price. Even if a company has good fundamentals buying it at the wrong price can be as bad as buying a bad company at a cheap price.
I knew some guy who felt the need to acquire landed assets and not loose out in what was called “the new Lagos”. He invested a lot of money buying up lands from land owners and communities without bothering to confirm if the lands in question had legal title. Years later, he found himself fighting with land grabbers and people who also claimed ownership to the land. Real Estate is a great form of investing but only it is only as great as the title documents attached to it. If you do not have legal ownership to the land as represented by a certificate of occupancy then you are setting yourself up to loose all your investments
Wrong Career Choice
Wale felt the need to get into University by all means no matter the course he was offered. He ended up getting admission in Religious Studies. FIve years later he was in the labour market searching for a lucrative employment.
Many do not see this as an investment even though it probably is the most popular form of investment out there. Some people go to the University to become Lawyers, Accountants or Doctors because they have a passion for the profession. However, different professions attract different financial reward. You do not for example expect a graduate of Religious Studies to earn a six figure monthly salary upon graduation. However, on average you would expect a Doctor or Lawyer to earn that much upon graduation. This is does not in anyway diminish the value of studying religious studies however, it is important to invest in the right education that will guaranty you the remuneration you expect.
Investing in a Ponzi Scheme
Shade visited her friend Zainab early one Monday morning searching for what to do with the N2million her Uncle just gave her. Astonished to find out she had that kind of money lying idle, Zainab admonishingly asked her if she hadn’t heard of the latest investment scheme in town where people deposit as little as N1million only to be paid N200,000 every month for 4 months and then the balance N1million. Shade wasted no time investing and two months later the N800,000 was the only amount she got back from her N2million. The investment was discovered to be an HYIP.
Ponzi (Pyramids) Schemes or HYIP (High Yield Investment Programs) are one of the easiest form of making money and also one of the easiest at losing. Most times they are made known to us by friends and family members who may have made massive returns investing in them. Unfortunately, more people lose more money investing in them than they make from them. They are mostly not backed by any asset or significant investment as such people only make money from them when other contribute. The money contributed by the last to get in is shared by those who contributed before them and so on. The scheme collapses and everyone losses when there are no more contributors. NEVER INVEST IN THESE SCHEMES
Investing money in the wrong fund
Recently, a well known Discount house collapsed and innocent savers lost money. A lot of the of the victims had invested their savings with a company with a history for delivering god returns. Unfortunately, they believed so much in the Discount House they didn’t bother to diversify their portfolio and instead trusted all their savings with the House. Most of the money lost to banks and other financial service providers is from investments in Fixed deposits, certificate of deposits, mutual funds etc. Whilst these are all good investment schemes, they carry quite some downside risk that an innocent investor might not know about. Unlike FGN Bonds and Treasury Bills which are safer and guaranteed by the Government in full, Fixed income securities with Financial Service Providers is only as safe as the solvency of the provider. If the provider goes bust so goes your money. You should hence be careful and scrutinise the provider like you would if you were lending to an individual.
A retired civil servant invested his gratuity and savings in a business he thought was going to earn him a lot of money. Whilst the business was a good one, he unfortunately went in at the wrong time. He didn’t realise a cartel controlled the business and failed to grasp the immense need for good distribution network. By the time his goods arrived, the selling price had crashed 20% below his cost price. By the time he was done selling, he only managed to recover 50% of his investment.
When you invest in the wrong business, you basically have thrown your money away. Before making an investment decision in a business that you either own or don’t own, it is important to conduct proper research, feasibility study and due diligence before investing. Most people who do not end of loosing their hard earned savings.
Owing too much
Most times, people who borrow do so with a mindset of using the money for a purposeful investment. However, when you owe too much there is tendency not to save or invest. It is a vicious cycle that is hard to come out off. Your so called investment may become a burden as you end up paying back your borrowers leaving you with little of nothing . A startup in the business in the business of printing and stationery soon faced this problem after they found it hard to balance paying back a loan of N10million and reinvesting in the business at a stage where the business required more time. Soon the business closed shop.
This article originally appeared in Nairametrics on the 23rd of November, 2013
FMDQ admits Axxela funding of N11.5 billion bond on its platform
FMDQ explained that Axxela Funding 1 PLC is a special purpose vehicle incorporated by Axxela Limited.
The FMDQ Group, through its subsidiary, FMDQ Security Exchange Limited, has admitted the Axxela Funding 1 PLC N11.50 billion Series 1 Bond on its platform.
According to News Agency of Nigeria (NAN), this was disclosed by the FMDQ Group in a statement that was issued on Thursday, July 9, 2020, in Lagos.
The statement explained that FMDQ admitted the N11.5 billion Series 1 Bond, which is under the Axxela Funding N50 billion bond programme on its platform.
FMDQ explained that Axxela Funding 1 PLC is a special purpose vehicle (SPV) incorporated by Axxela Limited to raise funds through the issuance of debt securities in the domestic capital market.
According to the statement, “Axxela Limited, owned by Helios Investment Partners, is a natural gas shipping company on the West African Gas Pipeline, providing unique energy solutions with presence in Nigeria and gas export operations in neighbouring West African countries.
“The admittance of the Axxela bond is testament to the opportunities which the Nigeria Debt Market Capital (DCM) avails to corporates in diverse business areas and further, to the potential of the market to support stakeholders effectively even as they carry on their activities in the face of the pandemic.
“The Axxela bond, by its listing on FMDQ, shall be admitted onto the FMDQ Daily Quotations List; thus, promoting the much-needed transparency for investors and providing a credible basis for portfolio valuation daily.
“Also, through the global visibility which the FMDQ website and systems guarantee, the corporate profile of the issuer is raised even further ahead of tapping into other opportunities in the Nigerian capital market.”
The FMDQ in its statement revealed that the Nigerian Debt Capital Market plays an important role in the efficient mobilization and allocation of resources in the economy. Despite the impact of the current economic crisis, the market had continued to effectively support corporate firms looking to expand their business operations.
Therefore, the FMDQ, in its role as a market organizer of the Nigerian Debt Capital Market, amongst others, has continued to provide stakeholders in the Nigerian capital market with a credible and robust platform for capital access, risk management and transfer of value.
This means that Axxela Series 1 Funding will have the opportunity to global visibility through FMDQ Exchange’s website and systems.
The Series 1 bond would be included in FMDQ Daily Quotations List, in order to ensure and maintain information transparency.
Covid-19: Companies raise N222 billion in capital during lockdown
Corporate organizations successfully raised at least N222.6 billion from the 24th of March till date.
The COVID-19 pandemic is unarguably the greatest disruption of recent times. Not only has the world been faced with the existence of a real-life plague, but its impact has also been felt across industries, economies, markets, and more. Yet, corporate organizations successfully raised at least N222.6 billion from the 24th of March till date, covering the toughest periods of the economic impact of the pandemic itself as well as the pandemic-induced lockdown.
Across the world, businesses and companies alike have sought out ways to curb the menace that is the pandemic through the introduction of cost-cutting measures to withstand the storm. However, in the midst of this, an array of companies have also sought out ways to raise finance to ensure their sustainability while also leveraging the relatively cheap opportunity to raise capital.
Increase in Listing
Data from the Nigerian Stock Exchange (NSE) reveals corporate bodies and the government have raised capital and facilitated secondary market trading activities worth over N1.8 trillion. A number of securities have also been listed on FMDQ. Methods used cut across Rights Issues, private placements, bond listings, etc., and they have been supposedly geared towards supporting working capital needs of the organizations, facilitating business expansion and more.
Listings over the period include; LAPO Microfinance Bank’s bond worth N6.2 Billion, NewGold ETF valued at N7 Billion, UACN Property Development Plc’s N16 Billion Rights Issue, Dangote Cement Plc’s bond worth N100 Billion, FBNQuest Merchant Bank’s Series-1 N5Bn Bond, Flour Mills’ N30 Billion Series 13 & 14 Commercial Paper programme, Primero BRT Securitisation SPV Plc bond worth N16.1Bn Bond, and the Golden Guinea Breweries Plc’s private placement of N1.2 Billion. Also listed are MTN Nigeria Communications plc’s proposed series of N50 billion and Transcorp Hotel’s N10 billion Rights Issue.
In addition to this, several Government Bonds worth over N797 Billion have also been listed within the past few months. Other companies have also listed capital financial issues include Guinness Nigeria (N5 billion) and United Capital (N20 billion) through commercial papers, also offering low-interest rates to suit the overall trajectory of the economy.
The amounts raised
Of the various amounts listed over the same period, Flour Mills has raised N7 billion. FBNQuest Merchant Bank’s 5 billion issuance was 2.3 times oversubscribed but news reports are not clear as to how much was actually received; UACN Property Development raised N16 billion; Dangote Cement was 1.5 times oversubscribed, raising N155 billion; The Golden Guinea Breweries, Primero BRT Securitisation SPV, and NewGold ETF were all 100% subscribed at N1.2 billion, N16.1 billion, and N7 billion respectively. United Capital raised N5.3 billion in Commercial paper issuance and N10 billion in its Series 1 Bond issuance, and LAPO Microfinance is ongoing. This brings the total amount raised in the period to at least, N222.6 billion.
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The attraction with raising capital in a COVID-19 era
The pandemic has brought about the world’s worst statistics and Nigeria is no exception with rising inflation juxtaposed with lower-than-normal interest rates – and that appears to be the catch. A common phenomenon across these bond listings is that many have been oversubscribed despite COVID-19 headwinds. In other words, with very limited opportunities available across markets, investors have rushed at many of these bonds at their comparatively low coupon rates. Given that these investments are locked at fixed interest rates, companies now have the opportunity to piggyback growth strategies on affordable capital raising. With investors, on the other hand, grappling for opportunities to shield their funds from inflation, the situation appears to take the semblance of a win-win situation.
Why interest rates on treasury bills, bonds crashed
The yoyo between debt and equity is likely to ensue as uncertainty remains in the forex market.
The Nigerian debt market has been faced with a series of challenges, most of which were triggered by the worst pandemic recorded in human history. Its prospects in attracting foreign portfolio investors were dampened as macros on Nigeria’s economy revealed a downtrend in the market, and this trend has only worsened in the past months.
The fixed income market sustained its downward trajectory for the third consecutive month in June 2020 largely driven by excess liquidity as well as an overall scarcity of instruments in the market. Reports from several analysts indicate the demand for fixed income securities has increased considerably over the last 6 months driving down interest rates earned by investors.
Victor Silas an Investment analyst told Nairametrics about the OMO bills liquidity for the month of June. He said, “For June, fixed income rates were liquidity-driven following the ban of locals from OMO and limited investment outlets. OMO bills maturities are creating more liquidity for locals and it is finding its way to the bond market and Treasury bill.
READ MORE: How to invest in uncertain times
“The 2050 trading below 11% yield and the 364-day Treasury bill closing at 3.4%. It just tells you there are a lot of liquidity concerns for locals.”
Most foreign portfolio investors based abroad are staying out of naira debt dominated securities; this shows that Nigeria’s debt markets are now controlled by local investors.
Nigeria attracted just $67.9 million in Foreign Portfolio Investment (FPI) inflow for the month of April 2020, the lowest inflow recorded this year. A cursory look at the Central Bank data shows that FPI sharply reversed from $2.30 billion at the beginning of the year (January) to just $67.9 million inflow in April 2020. Nigeria like most emerging markets relies heavily on foreign portfolio investments to shore up its external reserves and manage its exchange rate position.
Portfolio inflow into money market instruments fell from N1.6 billion and N1.4 billion in January and February respectively to just N229 billion and N49 million in April and May respectively. On the flip side, those that still have their investment stuck in Nigeria, have stayed away from any other type of investment except money market instruments such as bonds and treasury bills. Most of the investors are waiting patiently for the central bank to fund their dollar purchase so they can exit.
Emmanuel Orji Emerging Market/ Fixed Income Trader, COMERCIO PARTNERS spoke to Nairametrics on the performance of fixed income securities in June. He said;
“Subsequently, the unexpected reduced sale at the June bond auction of NGN100 billion as against the NGN150 billion originally offered further strengthened the aggressive bullish run in the bond market.
“The bond auction closed relatively strong as a result, with a bid to cover ratio of 3.6x and rates declining by 120bps, 70bps, and 45bps to print at 8.00%, 11.00%, and 12.15% across the 3-year, 5-year, and 30-year maturities respectively. Note: BPS refers to basis points, a financial term for percentages. 100 basis point is equal to 1%.
“As a result, yields for the benchmark securities monitored declined across all maturities on a month-on-month basis, with yields of the sovereign bonds with 3-year, 5-year, 10-year and 20-year maturities declining by 332 bps, 138 bps, 96 bps, and 138 bps to close at 5.64%, 7.13%, 9.76%, and 10.05% respectively.
“Given the amount of idle PFA cash sitting in bank placement (c. NGN1.5 trillion) and the sudden weakness in demand for equities, we expect the buying interest to persist in the near term, which should drive yields lower in the bonds market.”
Nigerian fiscal stakeholders have resorted to borrowing domestically as opposed to seeking for funds abroad, another effect of the pandemic. This is expected to lead to an increase in the yields of FGN bonds in the short and mid-term horizon as the inward plan to seek funds locally intensifies.
Where this leaves equities
Concomitantly, the equities market benefitted from the apparent thirst for asset yielding investments in recent months. As yields for safer investment fell, investors shifted to the equities market taking advantage of the earning season often market by dividend payouts. Most stocks paid dividend yields in double digits following the stock market crash in March 2020.
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But by June the market sell-offs ensued with investors moving funds out to secure stakes in corporate debt securities. The yoyo between debt and equity is likely to ensue as uncertainty remains in the forex market and the country’s stimulus plans.
Some retail investors who spoke to Nairametrics insist they have abandoned the Nigerian Stock Market preferring to trade in cryptocurrencies or US stocks. The proliferation of intech supported investing apps has made cross border investing easier providing access to market far beyond the shores of Nigeria.