As expected, on the 4th of May 2020, Lagos State relaxed the lockdown and many of the scenes that played out show that we still have a long way to go in appreciating our “new normal”.

Whilst we are all still figuring this out; we will be exploring the following stories this week:

  • Some gems from Warren Buffet’s speech at Berkshire Hathaway’s 2019 Annual General Meeting:
    • “When change happens to the world, you adjust to it” – he was dispassionate about his decision to sell off his entire airline stock.

As far as he is concerned, the current crisis in the aviation sector (caused by the pandemic); will not be over for some time.

As such, he moved decisively and sold an estimated $6 billion worth of shares. This action is also known as Capitulation. (see below for further explanation)

The takeaway here for me is the fact that sometimes, we need to cut our losses early and move ahead.

I am sure we can relate to this; we have some moribund stock/investment, we should have exited from years ago.

“Capitulation is when investors give up any previous gains in any security or market by selling their positions during periods of declines. Capitulation can happen at any time, but typically happens during high volume trading and extended declines for securities. A market correction or bear market often leads investors to capitulate or panic sell. The term is a derived from a military term which refers to surrender.”

Investopedia

  • “I would not put all my money in one company, you get surprises in this world” – very candid opinion on the need to diversify stockholding. Understandable, given his experience in Heinz Kraft.
    • “We don’t want to be dependent on the kindness of friends even, let alone strangers. – his explanation for hoarding cash.

 His company currently has a cash holding of $137.2 billion (about 4 times Nigeria’s external reserves!). This is a position worth emulating.

  • “If you have owned the businesses you liked prior to the virus arriving, it changed prices, but nobody is forcing you to sell” – he was/is discouraging investors from selling shares due mainly to changes in price.

Although Buffett was referring to US stock, this advice applies also to Nigerian stocks.

  • A few rich states, many poor ones ……That grim NBS report:

Last week, the National Bureau of Statistics (NBS) released the 2019 Nigerian Living Standards Survey.

The report, which is the first in 10 years, notes that 40% (87 million) of Nigerians are unfortunately currently living in poverty.

The measurement of poverty line was amended to suit the Nigerian context. Both the NBS and World Bank arrived at N376 daily (N137,480 annually).

Due to this, the 2019 report cannot be compared to the 2009 report which used the global World Poverty Index for its calculation. This has been faulted by analysts as it makes comparison impossible.

Highlights:

  • Borno State was completely omitted from the report as many areas in the state were deemed unsafe to visit.
    • Poverty rates in the Urban and Rural areas are 18% and 52% respectively.
    • Lagos State has the least poverty rate – meaning only 4.5% of its inhabitants live on less than N376 daily.
    • Oyo, Ogun, Osun and Delta States also have poverty rates below 10%.
    • Sokoto, Taraba and Jigawa have poverty rates of an average of 40%
    • Education and household sizes are correlated to poverty rates. Families in the South tend to be educated and have an average of 3 children whilst in the North East, the average household size is 8 and uneducated.
    • Over 90% of children in the South aged 5-14 years attend school whilst it is 55% in the North
    • 60% of students in the South West attend private schools whilst it is only 14% in the North West

Some business implications for an Investor:

  • Location matters – the market is still here in Lagos State (the wealthiest relative) and its environs.
  • Education value chain is good business for those interested (at least in the South!)
  • Fast Moving Consumer Goods (FMCG) remain a viable area of investment in the urban areas.
  • There is still room for sustainable farming (scalable farming and food processing) given the high poverty rate in rural areas.
  • Let’s talk about trust funds:
    • A trust fund is a legal entity that holds assets on behalf of a person or organization.
    • The assets can include cash, stock, property, landed property, business etc.
    • The affairs of the trust is managed by a neutral person known as the trustee
    • The trustee administers the affairs in accordance with the terms of the trust.
    • Some trusts terminate at specific times for example when the beneficiary reaches a specific age whilst some run in perpetuity covering beneficiaries and their descendants.
    •  Trust funds are different from wills in that only the trustees and beneficiaries are aware of the contents and terms.
    • Many trust funds contain a “spendthrift clause” which prevents beneficiaries from using the fund’s assets to settle debt obligations.
    • Types of funds are the irrevocable trust funds (terms are ironclad and can’t be changed), revocable/living trusts (subject to change as assets can be added or removed) and charitable annuity (used by those who bequeath assets to schools etc)
    • Nigerian employees are permitted to include  their Pension Savings Accounts in trust funds.
  • Some lessons learnt from the lockdown:
    • Nowadays, having one income stream is a risky venture as many business owners and employees discovered
    • Food business is good business – irrespective of the situation, “man must wack” and many caterers, bakeries and farmers made a kill.
    • Ecommerce is the way to go. The lockdown didn’t prevent sales for those who had the foresight to set up online shops or have visibility online.
    • If you offer value, people will pay for it. Those who made a kill selling courses, e books and online training can attest to this.
    • There is always something new to learn. There were and are still free courses, webinars and books available for those interested.
    • Nothing is guaranteed – overnight, many sectors and businesses were upended – transportation, education. tourism, hospitality, personal grooming to name a few. For some of these sectors, there is a long road to recovery, and some have been changed for good. Even, joy security needs to have honorable mention here.
    • Life truly goes on!
  • What is Drip Investing?
    • Also known as Dividend Reinvestment Plan
    • As the name suggests, it entails using the proceeds of the dividends earned from a stock to buy more of the same stock.
    • Many of us tend to treat dividend as income but dividend reinvestment is like compounding interest.
    • It is an easy and convenient way of increasing your stock position in your preferred companies.
    • It also aids accountability of funds as well as wealth acceleration.
  • Interesting Facts:
    • $50 billion – loss incurred by Berkshire Hathaway in Q1 2020.
    • $3.2 billion – amount of the late General Abacha’s stolen funds that have been returned since 1998. (Now, this is a good example of a trust fund!)
    • 5.7% – Nigeria’s tax to GDP ratio as at 2019. In comparison, it is approximately 17% in many other African countries including Ghana.

This is instructive to note as the oil revenue runs dry and the Federal Government and States are forced to look for other avenues of making up the variance.

I forsee aggressive enforcement after “COVID 19 storm” settles.

Till next week, stay safe and remember to wear your face masks and practice social distancing when outdoors.

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