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Behavioural finance and asset re-balancing (II)

By Eze Nwagbaraji
Asset Re-balancing
Mass exodus out of the stock market due to fear is an absolute disregard for a long term investment plan that is driven by fundamentals. The shock caused by irrational exuberance and fear are volatilities inherent in markets.

These volatilities should not lead a determined investor into an emotional roller coaster that results in costly mistakes and loss of invested assets.

It is important avoid to getting caught up in the leading market sentiment of the day or the time, which are driven by fear or greed. Stick to the fundamentals of investing.

Choose suitable and well taught out asset allocation mix. Those who are risk averse should not allow themselves to be susceptible or to be overrun by fear dominating the market. Every investor should know their tolerance levels. Understand why you are in the market and the reasons for investing.

At least once a year, re_evaluate your investment strategy. Flexibility should be part of your investment strategy. This is where asset re-balancing comes in. There are no hard or fast rules to this. Asset re-balancing is an attempt to make sure that the assets in your portfolio are balanced and as a strategy you may want to maintain the balance.

It may involve periodically buying or selling assets in your portfolio to maintain your desired level of assets.  For example, if your plan calls for 40:60 percent ratio between bonds and stocks in the portfolio, on review, due to appreciation or depreciation, an asset class may have gone up or come down. You may sometimes need to sell some of your winners in attempt to balance the ratio.

Yes. Investment involves risks. However, such risks can be calculated risks and when disciplined and consistent long term approaches are applied (behavioural finance), you are more akin to weather the turbulence of our world than a random approach.

Systemic risk avoidance in an investment portfolio is a proactive involvement and constant review of the asset classes in your portfolio.

The leading primary reasons why people invest in the market include having increased funds available for retirement years of life, ability to pay for a child or children education, anticipation of a future investment in such things as a home, etc. None of these is going to get cheaper in the future.

The cost of University education in Nigeria is unquestionably going to keep going up. Cost of living will go up and so will the cost of a new home. Irrespective of the age at which the investor begins to participate in the market, meeting these visions, require aggressive consistent participation in the market.

As our economy continues to expand along with the deepening of our democracy, Nigerians will have access to a myriad of investment vehicles across the world.

Technological innovations have made it absolutely possible to be a self directed investor.

Some of the world’s leading corporations, through various corporate vehicles such as Direct Reinvestment Programs (DRIPS) and direct share acquisition programs allow anyone with the funds to acquire shares of the corporations, by passing the services of conventional brokers.

Some of these corporations encourage direct share acquisitions, because, individual investors have more loyalty to corporate affiliations than institutional investors. Some of the corporations give discounts on market prices and even defray costs of such direct share acquisitions.

Parent companies of some of the corporations listed in our local exchanges such as Coca Cola, ExxonMobil, Colgate Palm Olive, allow global participation in the parent companies, exposing investors to income derived from global operations as opposed to local operations. Coca Cola Bottling Company of Nigeria’s parent company, Coca Cola, Inc. headquartered in Atlanta, Georgia, United States, is a global food and beverage behemoth with a market capitalization of US$140 billion.

The corporation pays an annual dividend of $1.76 per share or three percent of its share price as of close of business on October 5, 2010. ExxonMobil Corporation is by far the largest comprehensive oil refiner on earth. It has a market capitalization of US$326 billion and pays an annual dividend of $1.76 or nearly 2.8 percent of its share price as of close of business on October 5, 2010.

Other corporations present as either active businesses in Nigeria with global operations that allow global participation in their equities include Pfizer Corporation, with market capitalization of US$140 billion and dividend rate of 4.5 percent per annum; Pepsi Corporation, another food and beverage behemoth that competes against Coca Cola in global markets.

Pepsi has a market capitalization of US$109 billion and annual dividend level of $1.98. Chevron Texaco has a market capitalization of US$168 billion and pays $2.88 per annum in dividend. Proctor & Gamble, maker of such products as BIC line of products, numerous toiletries, batteries, etc. with a market capitalization of US$173 billion and annual dividend of S1.93. There are hosts of other companies also.

A proactive and functional Securities & Exchange Commission regulatory regime can effectively make these companies equities available to Nigerians locally at lower costs, given the large presence of these companies at the consumer levels.

However, these companies have global equity participation that enable investors to buy stocks direct from them, through their Direct Investor participation programs.

Furthermore, because these companies are headquartered in countries with near efficient and effective market regulatory systems, their compliance with regulatory mechanisms are high.

Re-balancing a portfolio and repositioning may require a mixture of some of these companies and given their history of dividend payout, investors in some of them have the assurance of consistent dividend payments.

Barriers to Successful Investing
Know and understand the barriers to investing that most affects you. During the banking consolidation under the President Olusegun Obasonjo administration, several investors front loaded their portfolio with bank stocks.

Some of these banks were coming to the market to raise funds with outstanding shares in the billions. The most accurate measure of profit is profit per share. There are approximately 150 million Nigerians. If a Nigerian firm comes to the market with 5 billion shares, how does one begin to rationally measure profit in such a firm.

Further, several of the companies were in the habit of declaring bonus shares, creating the notion that the more shares you owned, the better you stood, a notion to is economically defective.

None of these companies have made any conscious efforts at mopping up some of these excess shares and both the Nigerian Stock Exchange and the Securities and Exchange Commission have done little to encourage the mop up of these shares.

Emotions, rumours, and chasing the next fad in the market disguised as opportunities, only lead one to the wrong path. You cannot make money by losing money. Avoid irrational market and investment hot balloons. Irrespective of the success or failure that you have met in the market, there must always be a continuous struggle to remove barriers to achieving your stipulated goal.

Market rumours are more damaging to planned strategy than a bullet shot into a moving vehicle. Technological innovations in communications over the past two decades have made mass distribution of faulty market information easy.

A determined market fraudster can transmit millions of e-mails and or text messages to a target audience in a twinkle of an eye. Some of these fraudsters are engaged in self-serving pump and dump tactics in the market. If you understand the fundamentals of the companies you hold in your portfolio, do not allow market noise to force a change in your strategy.

There are no silver linings in the sky, and if there are any, you may not reach them because there are sufficient self serving interested individuals that will be there before you. Investment over the long haul is a systematic and gradual approach that takes time.

The journey is long. Few instances of bumps on the road would not disrupt or shorten the distance.

During the re-balancing of your assets, if you discover classes of assets that have due to significant appreciations tilted the entire portfolio, do not hesitate to sell some of them.

Even though they may be your winners, always bear the maxim, stocks go up and down in both good and bad markets, in mind. During the dot-com burst, several technology companies that have now been consigned to the grave yard of failed corporate experiments went from high double and triple digit dollar figures to nearly pennies in days.

Imagine owning share in a company that trade at $99 per share and within days such share came down to $1.00 These are some of the lessons of the market.

If you are in the market, embrace knowledge and educate yourself about the market. Failure to do this is like refusing to know the road through which you get to your house every day.

How can you contemplate driving home, if you do not know the road? Yes, you may ask for directions, but it will be necessary to know the road to enable you get there fast. Some out of favour stocks are out of favour because the market has not discovered them.

If you have the ability to discover these stocks, the very essence of value investing, you are more likely to do well, when you take positions in the company before others come knocking on the door. A stock price is a function of its market demands and the number of shares available to be sold in the market. If the number is low, the market bidding process will push the price higher.

It may be necessary to abandon shares that you are convinced have been beaten up in the market, especially where there are fundamental flaws in the company’s business fundamentals.

If a company is in an industry that has low barrier to entry, most likely, it will face stiff competition when other market players enter the market.

Stay focused to your investment strategy. Do not get swayed by euphoria. The stock market remains the most lucrative source of wealth creation ever invented by man. You just have to engage it rationally.


Disclaimer

Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.