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Home Spotlight

A tale of two friends: One invested in stocks the other in forex

Nairametrics by Nairametrics
August 15, 2016
in Spotlight
A tale of two friends: One invested in stocks the other in forex

A tale of two friends in an economic recession

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Two years ago and just when the Central Bank announced its first round of devaluation two friends talked about its impact on the Nigerian economy and what this could mean for their portfolios. They both had investments in Nigerian stocks and were disciples of Value Investment.

As events in the economy unfolded they pondered on what their next move would be. Obinna believed he was better off remaining in stocks as he felt prices of stocks could plummet giving him an opportunity to buy fundamentally sound companies on the cheap. Mike on the other hand had a gloomy feeling about all of that was happening around him and opined that he was better off betting against the Nigerian economy. Mike felt better off selling off his entire investments, including stocks , real estate and treasury bills. To him, he would rather be investing in dollars. Mike sold of his entire portfolio worth about N10 million and had about $55, 555 in his domiciliary account. Obinna kept his N12.5 million worth portfolio in stocks and another N4 million in the money market.

Mr Komolafe on the other just got paid N50 million for a house he just sold. He called his son-in-law asking that he invests it in another choice property in Abuja. His son-in-law Debo advices him against doing just that and tells him to instead buy dollars. Mr Komalafe felt it was a bad advice as he was buying dollars at N180 when just a few weeks back he could have gotten it for N165. However,  Debo was dogged and told him to take the advice. He eventually did and deposited the $277k in his accounts.

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In hindsight, it’s easy to agree Mike was the better of the two friends in terms of who probably fared better. Mr Komolafe will also bless God for the right choice his wife made in picking the right husband.

As the chart below depicts, speculating in forex has probably paid off more for some than investing in stocks.

Exchange rate $/N 2014-2016
All Share Index 2014-2016

For Mr Mike and Mr Komolafe their savings in forex is now worth about N22.2 million and N110.8 million respectively in a little under two years. This is an example of how to make that money work for you. For Obinna, his portfolio didn’t do as expected as stocks which appeared cheap in early 2015 turned about being expensive at the end of 2015. His portfolio is currently down by about 19% and in danger of losing even more as the economy closes in on a recession.

20152016%change
All share index 33,943 28,009-17%
Naira/Dollar20039095%

An investment in dollars in 2014 yields a whopping return of 95% compared to the All Share Index which has lost about 17% within the same period (Jan 2015 – August 2016). True, some stocks have returned over 100% in the last one year but we all know you can’t beat the market.

The sad part of this story is that it depicts the Nigeria of today. People who work hard just to earn a return of 20% end up losing 100% of their investments. So rather than invest in a business that will employe more people and create value to the greater society, we end up saving it in an alien currency. Even investing in real estate can’t beat these sort of returns.

Lesson here is to bet against your economy in a recession if it is import dependent.

 

Tags: All Share IndexNigerian recessionNigerian stock marketNigerian StocksPersonal FinanceReal Estate NewsTreasury BillsYour Money
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Nairametrics

Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.

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Comments 3

  1. TUNDE OKE says:
    August 16, 2016 at 10:43 am

    In a way I did just that and that’s the truth of the matter. In times of uncertainity, fly to safe havens

    Reply
  2. Uzoh says:
    August 31, 2016 at 1:36 pm

    Very true. I know someone whose N5 million naira investment is worth a little over N1 million now.

    Reply
  3. IRENE AYORINDE says:
    August 31, 2016 at 2:00 pm

    Banks are not accepting deposit domiciliary accounts, so for now how does one invest in dollars, keeping money in cash is both dangerous and unwise, what do you advice

    Reply

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