Fear and loathing on the Exchange

If the three Rs, namely reading, writing and ‘rithmetic are the foundation of basic learning in elementary school, for investors on the Nigerian Stock Exchange (NSE), the apposite Rs would be rancour, recrimination and regret. For them, intemperate, even if misconstrued, statements by the Central Bank governor, whatever the genuine intent, have only added insult to injury. Today, blame and bitterness are their natural sentiments.

For years, stellar returns on the bourse, underpinned by high oil prices, economic reforms, a stable currency, foreign debts clearance and banking sector consolidation, convinced many that the good times were here to stay. When the evil day arrived, it came with a ferociousness few could have foretold. Not even the doomsayers could have foreseen the fury of the dizzying reversal of fortune.

What followed was not a mere price correction to align domestic valuations with those in comparative sectors in other frontiers and emerging markets as anticipated by analysts like Andrew Cuffe of JP Morgan in his May 2008 report announcing the initiation of coverage of Nigerian banks, but an aggressive re-pricing of risk that could scarcely have been foreseen by any local adherents of the Black Swan hypothesis. To call it a casual clipping of price earning ratios would be a euphemism. It was the scraping and scalping of a lifetime. Bald for good.

In a July 2007 interview with the Financial Times, Bismarck Rewane, the economist, cautioned that "the most conservative people that I know are saying ‘unload my entire portfolio, I want to go into the equity market.' My sister-in-law does not know the difference between a stock and a bond, yet now she's sold property to go into it. (Very soon) she is going to start crying."

The kite flies

A week later, Yinka Idowu, head, corporate affairs at the stock exchange, proudly announced that "for the first time in the Exchange's history, aggregate turnover hit N1 trillion on Monday, July 23, 2007, while the All Share Index has exceeded the 51,000 mark". Juxtaposed with Rewane's supposed spoilsport views, the Exchange's spokesperson's voice was the more enticing one.

One voice warned, "you will lose money in future but I can't say when with certainty". Another voice whispered, "you have always made money in the past with certainty". Experience won the day. How else could it be? Why place bets against history?

The cries follow

Less than a year after, the public wailing on Customs Street, the stock exchange's address, began. One investor asks, "Why did I not get out earlier?" Another asks, "Why did I get in, in the first place?" Seed funds for a family house, savings for the children's education, set-asides for the wedding, plans for a leisurely retirement, put-away for the launch of an entrepreneurial venture and much more were all washed down the drain.

In all the years when companies were encouraging traditionally long-term investors to turn into stock price groupies they never stopped to ask what would happen when the tide turned. Like 16-year olds in the prime of youth, they wanted in on every Initial Public Offers, every secondary offering and every private placement. As the market index rose, these junkies kept getting higher. Another market close up, another fix. They forgot the Player's Code: if you play the market, one day the market will play you too.

Does anyone recall the projections in the prospectuses? Can anyone remember the estimates for Earnings Per Share and dividends in those documents? Not the companies anyway. They only paid lip service to those figures because they knew investors were too busy looking at the big board to study the small print. For better, for worse, companies succeeded in shifting the attention of investors from the performance of the business to the movement of the market. Capital gains were the new recreational drug and bonus shares the newfound shoot-up liquid. In the frantic search for veins to inject, very few paused to ask how much free cash these companies were actually generating.

The fallacy was exposed when reality showed that there was no necessary and causal relationship between buying a stock and its price going up. The price movement is dependent on a wider set of relationships than simple supply-demand dynamics. Then bang! The market crashed. Forced to go cold turkey, the ex-addicts have checked into rehab, picking up the broken pieces of their investments.

Those companies that did not involve themselves in these sinister habits still share some of the guilt because even when they knew that their share prices were frothy they refused to manage-down expectations. They too are passive collaborators.

When the market picks up again, companies should resist the urge to get high on their own supply. They should stop obsessing about their share price and focus on the inputs used in valuation models. Take care of the business and the market would take care of itself. Investors bought into the make-believe world that share prices would always go up. Let's make the Nigerian Stock Exchange a drug-free zone.

The writer is the managing director of a full service investor relations firm based in Lagos.