By Eze Nwagbaraji

The above words were uttered by the American, Thomas Paine in 1776 to express the awe he witnessed as a young nation, the United States was emerging as a Republic.

Paine was unique among the revolutionaries of his time. He believed in the American cause and was an inspiration to several of his contemporaries.

Current market situations in Nigeria and most African markets are presenting investors with trying times. It is through these times that fortunes are made, investment legends emerge, and great corporations are created. Investors have witnessed within a span of six market quarters, a near collapse of global equity markets, shrinking of wealth, and an unprecedented loss of confidence in equities.

Businesses and corporations previously believed to be sound came on the verge of financial capitulation and some into out right bankruptcy. Even to the most seasoned investor, these levels of chaos create extended moments of grief.

The investment world is unpredictable and complex. Periods of heightened economic uncertainties compound these complexities. However, history provides definitive guide to market participants.

Markets are non_linear, dynamic systems, and seasoned market operatives see market prices as highly random with trend components.  Chaos Theory is the mathematics of analyzing such non_linear, dynamic systems. It enables the market participant to see order in the complex environment of the markets.

Historical annual, monthly, weekly, and daily charts and structures of the market have similar appearances and as with natural objects, as we move closer and closer, we see more and more detail. Another characteristic of chaotic markets are their sensitive dependence on initial conditions.

This is what makes dynamic market systems so difficult to predict. Because we cannot accurately describe the current situation and because errors in description are infinitely compounded in the future by the overall complexity, accurate prediction becomes impossible.

The chaos theory is a complicated mathematical theory that seeks to explain the effect of seemingly insignificant factors. It is an idea that the theory can give an explanation for chaotic or random occurrences.

It has been applied to many scientific areas, including finance, where it has been used to argue that price is the last thing to change for a security. Using the chaos theory, a change in price can be determined through mathematical predictions of the following factors: a trader’s personal motivations (such as doubt, desire or hope that are nonlinear and complex), changes in volume, acceleration of changes and momentum behind the changes. The application of the chaos theory to finance remains controversial just as market chaos is controversial.

Value Investing
This is an investment theory that involves buying securities of companies whose shares are under priced relative to known fundamental analysis. For example, stocks that trade at discounts to book value or tangible book value, stocks that have high dividend yields, low price_to_earning multiples, or have low price_to_book ratios.

Value investors are long term investors and empirical market data on investor performances have shown that value investors, over time outperform other market participants. Value investors are the biggest beneficiaries of chaotic markets because their consistencies in seeking out investments that have intrinsic values, i.e. a definitive margin of safety, enable them to acquire investments at discounted prices relative to future distributions (dividends).

The venerable investor, Warren Buffett, one of the most erudite students of value investing and his investment vehicle, Berkshire Hathaway, for example, stayed away from investing in technology and internet companies during the decade of the 1990s.

They described the technology and internet boom era as speculative bubbles and saw chaos in the market. As an investment vehicle, Berkshire Hathaway under performed its pairs during the 1990s. The company however zeroed in on several non_technology companies that the market had overlooked. When the technology bubble burst at the turn of the new decade, Berkshire emerged again as a dominant investment vehicle.

Value investing is buying good companies at reasonable prices, not generic companies at a bargain price. Generic companies have limited history to rely on. Acquiring interest in companies with extremely strong financial positions at a price reflecting meaningful discount to their estimated net asset value creates financial integrity.

Value investors pay less attention to macro factor trends such as employment levels, movements in interest rates, gross domestic products, etc. This is not because of their diminished importance to the investors, but because attempts at predicting their movements are futile, especially during periods of market chaos.

Further, attempts at modeling investments with strict adherence to macro economic trends leads to speculation. The long term value market participant is patient and willing to allow the rest of the market to recognize and correct the hick ups that created the momentary value dislocations.

Market chaos creates suffering, pain, and uncertainty and the undisciplined individual investor takes the brunt of the crisis. It is a well known truism that suffering nurtures character and character leads to fundamental faith. The history of economic thought and time tested principles of markets have shown that fundamental faith in the market, devoid of speculation leads to success.

Understanding how to profit from market crisis is the greatest attribute of successful investors. This is not a call to become a speculator, but an understanding that uncertainty is an inexplicable component of life. The intelligent investor always invests with a margin of safety in mind.

Investing in a security at a significant discount to its intrinsic value is a guarantee for high return. For example, buying a ten Naira stock when the price is five Naira. In the current market conditions, it is not uncommon to invest in stocks where the liquid assets on the balance sheet _ net of all debts _ are worth more than the total market cap of the company. Where this occurs, the long term investor has actually bought the investment for zero, because when the market re_evaluates the share price and corrects, the price will move to its natural state, i.e. ten Naira. Even if the investor miscalculates, the decline in value is less punitive on the investment portfolio.

Great investors profit from periods of market volatility. They seize the opportunity to seek out good investment opportunities. Sound and rational examination of market facts, enable the long term investor to operate within well articulated market principles. He buys when the market makes sense and sells when the price becomes high.

Preserving invested capital is the primary concerns of astute investors. Averaging the cost of your investment enables the investor to achieve this objective. Averaging takes advantage of dips in the price and means that the investor doesn’t have to be concerned about buying his or her entire position at the top of the market.

Distributing one’s portfolio evenly between stocks and bonds is also a way to preserve capital in market downturns while still achieving growth of capital through bond income.

Individual investors with the commitment to stay the cause and actively participate in understanding the sometimes complex world of equity investment can create a habit of winning in the market and staying ahead.

The stock market remains the most viable source of wealth creation invented by man. It outstrips real estate investments and all other forms of savings. Its hallmark is its longevity. To successfully participate, the individual investor should have a commitment for the long term.