September 16, 2011 1938hrs / Taiwo Ologbon-Ori
It's the pattern investors have grown used to since the rolling financial crisis began in 2008 - The market moves to a point of weakness, and everyone is forced to reveal their true investment style and strategy. Its time for a new thinking to engage the different market cycle we are in, despite outstanding policy, product and practice issues which still remain crucial to the investment market.
Figuring out what to do sometimes is like trying to solve a Rubik's cube blindfolded. But there are plenty of different investment styles and strategies out there that can help, if only one took the pains to understand how. Even though the bulls and bears are constantly at odds, they can both make money with the changing cycles in the market. Even the chickens see some returns, though not a lot. The one loser in this picture is the pig.
Pigs, according to Investopedia, are high-risk investors looking for the one big score in a short period of time. Pigs buy on hot tips and invest in companies without doing their due dlligence. They get impatient, greedy, and emotional about their investments, and they are drawn to high-risk securities without putting in the proper time or money to learn about these investment vehicles. Professional traders love the pigs, as it's often from their losses that the bulls and bears reap their profits.
The market will most likely both rise and fall again. What really matters, though, is that at today's prices there are many extremely attractive individual investment opportunities at prices that will, in due course, come to look very cheap.
Where weak hands dominate the activities, taking the contrarian stand would be the most prudent path- Against this backdrop, discerning fund managers are finding many opportunities to buy good companies at great prices. As one said, "this is the opportunity to buy what I've always wanted to own".
Technically, not every fall/zero level translates to bad state, it is an opportunity for certain set of investors who can see beyond the fall. Being an advocate of long-term investing, this is my position towards some value stocks with growth potential that are trading at nominal value of N0.50Kobo.
Strategically speaking, my positioning in these stocks is hinged on a healthy PE ratio, EPS and liquid status of the stocks as these fundamentals helped a lot during quick diversification or portfolio reshuffling - this is part of my due diligence, as the extract above provides credence to investigations into details of a potential stock.
He that is down needs fear no fall- Considering the market risk, it appears that these stocks at nominal value (N0.50kobo) are immune against likely market risk as the value of these stocks cannot deplete further by default, though we would not underplay our due diligence.
However, the specific risk that are likely to have greater impact would have been taken into consideration fundamentally with EPS and PE ratio noted above. Maybe it is proper that I issue a caveat here – this position should not be construed as promoting these firms or a particular course of action but an attempt to share an orientation with common investors who might be ignorant of this opportunity.
Those who made significant fortune recently in the sudden resurgence of Transcorp Plc will obviously appreciate my position better. The stock moved between March 1st to April 15th 2011 from a nominal value posture of N0.50kobo to peak at N1.82kobo, recording 256% growth in less than two months (current price is N0.86k).
Nevertheless, we provide in this report, our observations on the stocks trading at their nominal values with the hope that we might glean an insight into their potentials and actualities.
REFERENCES: Technical Terms & Market Lingo
The Bulls: A bull market is when everything in the economy is great, people are finding jobs, gross domestic product (GDP) is growing, and stocks are rising. Things are just plain rosy! Picking stocks during a bull market is easier because everything is going up. Bull markets cannot last forever though, and sometimes they can lead to dangerous situations if stocks become overvalued. If a person is optimistic and believes that stocks will go up, he or she is called a "bull" and is said to have a "bullish outlook".
The Bears: A bear market is when the economy is bad, recession is looming and stock prices are falling. Bear markets make it tough for investors to pick profitable stocks. One solution to this is to make money when stocks are falling using a technique called short selling (something not available in our markets but has been advocated for by all those who believe in changing the mono-product bourse we run). Another strategy is to wait on the sidelines until you feel that the bear market is nearing its end, only starting to buy in anticipation of a bull market. If a person is pessimistic, believing that stocks are going to drop, he or she is called a "bear" and said to have a "bearish outlook".
The Other Animals on the Farm - Chickens and Pigs: Chickens are afraid to lose anything. Their fear overrides their need to make profits and so they turn only to money-market instruments or get out of the markets entirely. While it's true that you should never invest in something over which you lose sleep, you are also guaranteed never to see any return if you avoid the market completely and never take any risk.
Pigs are high-risk investors looking for the one big score in a short period of time. Pigs buy on hot tips and invest in companies without doing their due diligence. They get impatient, greedy, and emotional about their investments, and they are drawn to high-risk securities without putting in the proper time or money to learn about these investment vehicles. Professional traders love the pigs, as it's often from their losses that the bulls and bears reap their profits.
The Contrarian: In finance, a contrarian is one who attempts to profit by investing in a manner that differs from the conventional wisdom, when the consensus opinion appears to be wrong. A contrarian believes that certain crowd behavior among investors can lead to exploitable mis-pricings in securities markets. For example, widespread pessimism about a stock can drive a price so low that it overstates the company's risks, and understates its prospects for returning to profitability. Identifying and purchasing such distressed stocks, and selling them after the company recovers, can lead to above-average gains
About the Author(s): Taiwo OLOGBON-ORI is an analyst at Proshare with assistance from the Analyst Research team.
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