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Investment Tips

Guaranteed return

I want to address the issue of guaranteed returns, with a view to using that as a way to gauge offers in general.

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MSME's, Development plan, Guaranteed return

There are so many offers floating around the financial services space – farms that grow seasonal crops are offering a guaranteed fixed return, companies trading in the currency markets with huge per second swings are offering guaranteed profits, online equity trading apps are offering guaranteed returns to investors, etc.

I want to address the issue of guaranteed returns, with a view to using that as a way to gauge offers in general.

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First off, what is a guarantee? According to the Merriam-Webster dictionary, a guarantee is “an assurance for the fulfilment of a condition.” Thus, a guarantee “assures.”

What is a financial guarantee?

Simply put, it’s an assurance of a financial condition, usually a gain or protection from principal loss. For instance, a Guaranteed Investment Contract, “Guarantees or assures the owner a specific rate of return from an insurance company in exchange for a deposit.” A Guaranteed Investment Fund “allows its client to invest in equity, bond and/or index fund while providing a promise of a predefined minimum value of the fund (usually, the initial investment amount) [which] will be available at the fund’s maturity or when the client dies.” A financial guarantee is simply a non-callable promise to investors that stated principal and interest payments will be made.

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When the phrase, “Guaranteed Returns” is used, the issuer of the investment promise is saying and giving an assurance that come what may, the promise made on returns (and principal) will be met. This is a promise, it’s not callable, reversable or negotiable.

[READ MORE: INSIGHT: Understanding estate planning, asset protection, and asset transfer]

How do guarantees work in practice?

Well, there are basically only two types of investment products, Fixed Income for investments that offer fixed returns and Variable Income for investments that offer variable rates of return.

Fixed income products include bonds and mortgage securities issued by sovereigns or the private sector. All fixed income products offer an implicit yield when issued and investors are buying these securities to protect invested principal and earn a return. Fixed Income products usually have a sinking fund which is a separate account, usually managed by a trustee company, that receives regular payment from the issuing company. There contributions are pooled during the tenor of the bond and used to repay bondholder.

When investing in a fixed income product like a bond, especially issued by the private sector, the investors must ask:

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  • Is the bond “floating” or secured with assets?
  • Is there a sinking fund set up to pool funds to repay bondholders?
  • Is the sinking fund independently managed?

You want to get a solid “Yes” on all three.

Patricia

What about bank-issued products?

When you deposit money in a bank, it’s insured up to N500,000.00 by the Nigerian Deposit Insurance Corporation (NDIC). So we can argue that the risk-free deposit level for any Nigerian bank is N500,000.

The NDIC does not cover all investments in the financial sector; investments in Discount Houses, Finance Companies, Investment Firms, Unit Trusts/Mutual Funds and insurance companies are not NDIC insured. This means you should do a lot more due diligence with investments issued by these firms.

Variable income products are investments whose returns are not fixed or whose implied yield cannot be determined at purchase. Equity-based investments are examples of variable return products when you buy a share of MTN, you cannot determine with any certitude the return on your investment in 12 months; keep in mind that “past results of any stock of fund is not a guarantee of future returns.” Simply put, equity prices and returns are based on projected cash flows and earnings in the future. Because no one can predict the future, it follows then that no one can guarantee returns.

Let me be specific with two commodities I have seen over and over being packaged as “investments” i.e.,  Currencies and cryptocurrencies. The price of these commodities are based simply on demand and supply, nothing more. If more people buy, prices will rise, if demand falls, prices fall. These commodities have no intrinsic value, currencies are based on the full faith and value of the issuing government. No one can project demand, but anyone can gamble and take a position on expected rise and fall of demand. No matter how these products are marketed to you, once it involves trading in cryptocurrencies and currencies, you are essentially gambling. With gambling, there are no guarantees.  I’m not suggesting that they are illegal, gambling is legal, I am asking you the investor to be aware of this, and take enough risk management procedures.

When you as an investor get an offer, and the vendor offers you a guaranteed return, what questions should you ask?

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  • Is the firm registered with Corporate Affairs and the Securities & Exchange Commission? You want to know if the owners have been vetted. If they have share capital, and if are playing by regulated rules. But go further.
  • How is that guarantee being funded? If a farm promises you 20% from the sale of maize in the future, how do they guarantee that 20%, if the crops fail? Do they have a sinking fund? Is your guarantee in writing, with unambiguous language that guarantees a return to you at a set date and set return rate?
  • Is the guarantee backed by any third party? The farm has a bank that receives sales proceeds; can the farm get its bankers to issue a bank guarantee on that written promise to pay you, the investor, 20%? Ask questions…

[READ ALSO: If you experience these signs then know your salary is not enough]

Essentially, remember this

Gambling simply means volatility. If you have the risk-free rate at 12% to 14% via Federal Government Bonds and you receive a “guaranteed” return of 15% a month i.e., 180% a year from a product that trades in cryptocurrencies or currencies, understand that what is being offered is not an investment at all, but a trip to the casino – no difference.

4 Comments

4 Comments

  1. Olu

    November 13, 2019 at 9:43 pm

    Ha !!

  2. L

    November 14, 2019 at 1:37 pm

    Very insightful.

    Thanks

  3. Fidelis

    November 17, 2019 at 12:29 am

    I don’t see any agric investement product offering guaranteed return on investement, what they offer is guarantee return of capital which is what is insured by their insurance companies. So I’ll advice you don’t put funds with any product without a capital insurance from a recognised insurance company.

  4. Oluwafemi B. Onojobi

    November 26, 2019 at 6:05 pm

    Nairametrics thank you for this write-up. Any reader of this article would have their eyes opened and cleared from parkaged deception.

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Billionaire Watch

Want to be like Warren Buffet, Michael Phelps? Here are their secrets

The distinctiveness among Buffet, Dangote, Ovia, Phelps, Bolt, Musk, is not what they do, but how they do it and how often they do it.

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Warren Buffett

Michael Phelps won 22 Olympic medals (18 gold), how did he do it? Well, he trained and trained and trained, then he ate and ate and ate every day. He was also blessed with natural attributes i.e., he was tall.

So, wait, if I am tall and eat, and train, I can also win 18 gold medals? No! but stay with me.

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Warren Buffet likes to invest. He reads research reports, likes numbers and is always looking a discount deal on great stocks. Ok. So, if I am good with numbers, research buy great stocks I will become as rich as Warren Buffet? Well, maybe not as rich but you will earn more from your investments. The distinctiveness among Phelps, Bolt, Buffet, Musk, Dangote, and Ovia, is not what they do, but how they do it and how often they do it.

READ ALSO: Investing in Cryptocurrencies during this economic shutdown; here’s your need to know

Let’s look at an Olympic swimmer like Michael Phelps. When Michael was eight, he wrote out his goals; he wrote, “I would like to make the Olympics,” then listed his time goals for the various races i.e. breaststroke, freestyle etc. At the age of eight, this future Olympian had visualized his goals, written them down, and put a date for accomplishing them.

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When seeking to create a financial plan, it is impossible to achieve success without visualizing out a goal on paper. Imagine creating an investment plan without any idea of a retirement date or income or rates of return. It’s impossible without a clear road map to determine how much to save and invest for five years. During his teenage years, he trained “every single day, 365 days a year, Sundays, Christmas and Thanksgiving days included… and twice on his birthdays,” says his coach, Bob Bowman.

If an investor saved N1.00 every day for 5 years at 0%, that saver would have N1,826.00 What if those savings increased to N5.00 and were invested at just 5% annually? Then the savings pot will become N10,373.04. Yes, inflation will erode the value after 5 years, but applying a 13% inflation rate, the saver still has a real saving of N5,170.14.

READ MORE: Top 10 risks Nigerian businesses will face in 2020/2021 – Report 

So, the second lesson we take from Olympic champions is to start early, save, and then invest constantly. Micheal Phelps is a swimmer, a sport for endurance and speed. What do endurance athletes like swimmers and marathon runners eat? Food rich in carbohydrates; they need the carbs to fuel the massive amount of energy they expend during their sports. Phelps, for instance, for breakfast eats as many as 12,000 calories prior to his races. His breakfast consists of “three fried-egg sandwiches, three chocolate chip pancakes, a five-egg omelette, three sugar-coated slices of French toast, and a bowl of grits.”

What does a sprinter like Bolt eat? Not calories but lean protein, eggs, meat, fish, dairy. Protein allows muscles to recover and develop after sprinting, which causes minute damages to muscle fibres that can be easily converted to energy. So, two different Olympic champions, each multiple gold medal winners, but because of their different sports, they eat very differently to achieve a different objective.

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Similarly, in investing, each investor is different, bond investors have instruments that have 30-year durations as opposed to stock traders who may be looking to buy and flip a stock in hours. What is key is to invest according to a stated objective and risk profile.

Patricia

Where the investor has a longer endurance factor to risk, meaning the investor can accommodate volatility in his earning, that investor will be comfortable investing on equities. Equities are higher-risk investments and can lose all invested capital but can also gain 100%.

However, where the investor has a lower risk endurance, then the investor will fill his plate with lean risk asset classes like sovereign bonds which offer lower volatility to stock and deliver a fixed return, but suffer if interest rates rise.

Thus, our third lesson from the Olympians, the food each investor eats, is a function of his individual sport. Where the investors have lower risk, his asset allocation diet is different. Each investor must tailor his asset allocation to his objectives and investment goals.

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Investment Tips

Proxy Voting: Making Your Voice Heard Inspite of COVID-19

Proxy voting is a process where one person chooses another to represent him or her in casting a vote on his or her behalf.

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Proxy Voting: Making Your Voice Heard Inspite of COVID 19

One of the privileges of owning shares in a company is the ability to attend the shareholders’ meetings and vote on important issues about the company. In most cases, such issues touch on dividend declaration, election and/or reelection of directors, authorization to fix independent auditors’ remunerations, and the election of members of the audit committee, among others.

It has been observed that shareholders love to attend such annual general meetings in person for the pride of place it provides, as well as the social status it bequeaths to the attendees in addition to the souvenirs they receive during such meetings.

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Unfortunately, that era of a social event involving the physical gathering of shareholders seems to be going extinct, thanks to COVID-19.  However, in spite of the devastating effects of COVID-19, and the changes it is bringing to our social life, shareholders can still make their voices heard during non-physical shareholders’ or annual general meetings. This they can do using proxy votes.

What is Proxy Voting: Proxy voting is a process where one person chooses another to represent him or her in casting a vote on his or her behalf. Proxy voting has not been more important than in the present COVID-19 times. In reaction to the pandemic, proxy voting is being used in areas outside corporate governance. For example, the US House of Representatives is pushing for proxy voting as a means of getting things done in the house. In a proposal released by the House Speaker, Nancy Pelosi, US lawmakers would be allowed to cast votes for their colleagues who are not in the Capitol in person. That underscores the advantage and the increasing importance of proxy voting.

Nigerian Companies and Proxy Votes:  Proxy voting is not new in Nigeria, especially among Nigerian companies. Whether it has been effectively used or taken advantage of is another question. However, Nigeria’s Corporate Affairs Commission (CAC) has been proactive and forthright in its quest to ensure that companies in Nigeria and Nigerian shareholders alike, take advantage of the proxy voting process in keeping with the social distancing rules put in place by various governments to curb the menacing COVID-19. The CAC has therefore asked companies to take advantage of “S.230 CAMA on the use of proxies in holding their Annual General Meetings.”

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(READ MORE: IMF, World Bank to hold virtual meetings over Coronavirus epidemic)

In line with the availability of the proxy voting process as a way to give every shareholder a voice and the encouragement and enablement from the CAC, many companies in Nigeria are complying with the advice. A visit to the website of the Nigeria Stock Exchange indicates that all the 30 companies that notified the public about their annual general meetings via the Nigeria Stock Exchange, since April 1, 2020, included notices or indications of the need for proxy votes in such notifications. Many of them even included links to live-stream the events, for those who would like to participate online.

Proxy Voting: Making Your Voice Heard Inspite of COVID 19

Brace for Change: There is no doubt that COVID-19 has changed and will continue to change the way certain things are done. From the look of things, proxy voting may become the new normal in corporate governance and conduct of shareholders Annual General Meetings.

Shareholders, big and small, should start getting used to voting by proxy, especially those who have not been doing so in the past. It is only by so doing that you will make your voice heard, in the affairs of the company in which you have worked so hard to invest in.

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Patricia
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Coronavirus

A New Wave: Where to Invest in H2 2020

Some of the industries that are expected to succeed given the changing times are not your usual kinds of investments.

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A New Wave: Where to Invest in H2 2020

There are two kinds of people in the world: The ‘glass-half-empty’ kind, and the ‘glass-half-full’ people. Where some see problems, others see the opportunities – same glass, but different perspectives. 2020 might have left very little hope to hang on to, but the world is still in motion.

Amidst the chaos, many have found their diamonds in the rubble – and many more will. These people, however, will be those who are willing to adapt to the changing times by repositioning themselves to leverage the opportunities that arise.

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The Covid-19 pandemic has proven to be a holistic challenge, bringing to the fore a myriad of issues. It has caused a dent in the revenue/ disposable income of many businesses and individuals alike, shaken the very balance of the economy with many countries heading for unprecedented recessions, and left everyone with so much uncertainty.

Yet, we are at the cusp of a new dawn. Processes are changing, new industries are emerging, and money is changing hands. Flexibility, automation, and sustainability are just some of the words that will make all the difference in the world of business.

Dr. Ola Orekunrin Brown, the founder of Flying Doctors – a healthcare investment company – had, at the Quarterly Economic Outlook Webinar hosted by Nairametrics, offered insights into some of the industries that are expected to succeed given the changing times, and they have been outlined below. But be warned, a lot of them are not your usual kinds of investments.

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READ ALSO: The week that shook the world: the collapse of the Lehman Brothers and the effect it had on me

Investment opportunities to leverage in H2 2020

Online Events

One of the many trends that emerged in recent times, as a result of the Covid-19 pandemic induced lockdown in many parts of the world, is a huge dependence on internet technology and digital media. Everybody went indoors – and online. The entertainment sector found its home on social media through Instagram Live parties, Tik Tok, and the Houseparty App.

Companies went online as well, leveraging digital technology like Zoom, Microsoft Teams, and Slack. Even the lifestyle industry went online with online gym classes, yoga classes, and even karate classes. Not only have they provided much-needed solutions, they have also come with the additional benefit of convenience.

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A good example of this is Eric Yuan, the founder of Zoom, who joined Forbes’ billionaires’ list for the first time as a result of the increased use of Zoom for work meetings. Apptopia, an App tracking firm, reveals that Zoom was downloaded 2.13 million times around the world on 23 March, the day the lockdown was announced in the UK– up from 56,000 a day and two months earlier.

Patricia

Online education

Another feature of the digital economy lies in the education sector. With schools forcefully closed, classes have had to go online. Online courses, training workshops, and even full degrees will become more normal as those who work from home will see these online education courses as an opportunity to develop themselves with little effort.

Investments here will be even more fostered by access to international markets, thereby increasing the market size. ResearchAndMarkets predicts that the online education market is poised to grow by $247.46 billion during 2020-2024, progressing at a CAGR of 18% during the forecast period.

READ ALSO: Stay secure when shopping online – Follow these tips from Visa

Institutions that are too big to fail

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The stock market is expected to be even more volatile, given the overall unfavourable economic terrain and a high level of uncertainty – especially with all the talks of a recession coming. In H1 2020, the more favourable companies to invest in are those that have stood the test of time – the stocks that are too big to fail.

Many of these stocks have been in existence for decades and have been able to attain a level of stability as a result of their large market share and stable structures. You want financially strong companies and the reason is not far-fetched; the goal is to put your money behind the companies that are strong enough to withstand the storm to a good extent.

Telecommunication

Another by-product of the Covid-19 induced lockdown is the increased need for internet services. Dr. Ola explains that the use of the internet as well as the move to work-from-home, are some of the megatrends of the times.

Good internet connectivity has proven to be the lifeblood that keeps digital entertainment trends, digital work trends, digital lifestyle trends, digital entertainment trends, and a huge chunk of the communication we have today. As a result of this, companies in the telecommunication industry have begun experiencing growth in revenue and earnings. Investments in this sector will most probably be worth your while.

READ ALSO: Banking related phishing up 9% in 2019, e-stores down 10%

Distribution & E-commerce

When the Okada ban took place, several motorcycle companies that were affected were forced to pivot from transporting people to moving items as full-scale delivery businesses. While many might have thought that a bad idea, the lockdown has undoubtedly contributed to the development of this industry.

The e-commerce industry is also expected to thrive with trade moving predominantly to the internet. Investments in distribution companies and e-commerce businesses are also expected to be worth your while.

Stronger currencies

One of the major hits of the pandemic is the Nigerian foreign exchange market which has now become highly volatile. The demand for the dollar far outweighs the available supply and this has forced importers and speculators alike to scramble for what is available in circulation.

Given the challenges with the FX market, international spending on foreign denominated expenses like tuition fees or international loans will come at an increased cost. To mitigate foreign exchange loss challenges, investments in USD denominated equities, and Eurobond funds will help you withstand the storm. While gains here could have you betting against the Naira, having foreign investments in your investment portfolio will come in handy.

READ MORE: Edtech redefines learning during Coronavirus pandemic

Agriculture

The Agricultural industry is an expected gainer. One of the reasons for this is that local supply chains will expand, given the restrictions on the global supply chain as a result of the lockdown and the border closure. While this will also thrive, Dr. Ola Brown, explains that jobs will only be created in the short term.

This is because fewer hands will be required as productivity, better processes, and mechanization systems increase. An example of this is the new trend of robot herders in the United States. This is even more so as we compete with the rest of the world in production. Needless to say, Agriculture will always exist, given the need for food, as well as the rising global population.

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Healthcare

While the Covid-19 pandemic has a direct impact on the healthcare industry, the industry is a complex one. The first reason for this is that, with the healthcare infrastructure deficit in Nigeria, the government will need to invest in it to provide wide access.

With subsidies on healthcare, the free market in terms of investments might not be as lucrative with more people opting for government healthcare. However, given increased investments in the sector and the move to preventive health practices, the industry remains attractive.

For more detailed investment opportunities with specific stocks in the Nigerian Stock Market, sign up for the Nairametrics Stock Select Newsletter.

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