Nigerian Stock Exchange – Should you be cutting your losses in a bear market? Re: Nairametrics

“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” – Warren Buffett

So Nairametrics has an article out on why you should be cutting your losses in a bear market, in which it talks about the fact that the Nigerian Stock Exchange is down 10.8% this year (thanks to the coming elections) and is now the worst performing exchange in Africa (from the best in 2017).

I beg to differ. Here’s why.

 

History Repeating Itself?

A quick look at the index performance over the past year shows that it’s right about where it was about the same time last year. Considering the country was exiting the recession at the time while we are moving toward a typically turbulent election period, it is fair to expect that the index would further decline. So why do I think you should still hold on to your horses?

Nigerian Stock Exchange All Share Index 1-year performance
Nigerian Stock Exchange All Share Index 1-year performance

Let’s go further back in time. Looking at the index performance over the past 5 years shows that again, coincidentally it’s about the same position in 2013 when the economy was on a growth trend and being named the largest in Africa ahead of the likes of South Africa and Egypt. Again the direction was different but we see how low we can get as the market bottoms off during the 2016 recession.

Nigerian Stock Exchange All Share Index 5-year performance
Nigerian Stock Exchange All Share Index 5-year performance

 

The Big Picture

Still looking further back in time, let’s look at the NSE index’s 10-year performance.

Nigerian Stock Exchange All Share Index 10-year performance
Nigerian Stock Exchange All Share Index 10-year performance

Now we see a pattern… of sorts. Shortly after the 2007 bubble burst along with the global recession, we observe the Nigerian Stock Market All Share Index at another record low in 2009. Looking at the big picture though you can see a long term upward trend with peaks just before the 2015 elections (and subsequent recession in 2016). Another thing you notice when looking at the swings is the ASI is actually trending upwards despite the recent decline.

The moral here is simple. The market always goes through ups and downs, with prices peaking when everyone is rushing to buy (e.g. in 2013 when Nigeria was celebrated globally) and dips when everyone is dumping (e.g. during the 2016 recession). How you react to the swings will determine if you profit or lose.

 

A Word from the Greats

To quote America’s richest investor, Warren Buffet, “Be fearful when others are greedy. Be greedy when others are fearful”. The rule here is simple: you buy shares when prices are low (or declining), and you sell when prices are high (or rising). Most people do the opposite. Like Mark Twain said, “Whenever you find yourself on the side of the majority, it is time to pause and reflect.”

"Be fearful when others are greedy. Be greedy when others are fearful." - Warren Buffett
“Be fearful when others are greedy. Be greedy when others are fearful.” – Warren Buffett

If you had bought shares when the market was booming in 2013 and sold when everyone was panicking during the 2016 recession, you would have made a loss. On the other hand, if you bought shares in good companies during the recession and held them till now, your portfolio, like mine (humblebrag), would still be in the green.

 

What Would I Do?

While I’ll recommend you always check with a professional before making any moves with your money, my position during a bearish market is the exact opposite of Nairametrics’. Buy, buy, buy. But you don’t just buy anything. Buy stocks in the right companies. To learn more on how to select the right companies to buy shares in, check out my video on How to Pick the Best Companies to Buy Shares In where I explain the 5 things you must always check to choose the right stocks.

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