Welcome to the last 30 days in the first half of 2020. I am sure we will all agree that this has been a year like no other.

I am particularly thankful for the goals that have been met and for those that are still “work in progress, I am extremely expectant.

Despite all, I have chosen to see my glass as half full and awaiting refill. Whilst in this optimistic mood, we will be reviewing the following stories

  • Billionaire no more, Forbes removes Kylie Jenner from the billionaire list.

Last week, Forbes magazine removed Kylie Jenner (previously acknowledged as the youngest self-made billionaire) from its acclaimed billionaire list. This action came after accusing her of lying of about the revenues and size of her business.

Whilst that controversy is still raging (Ms. Jenner has rejected that claim); we can still learn somethings about her success:

  • She built her business by taking advantage of an opportunity – she took advantage of the interest in her use of lip filler injections to start selling her own brand of lip kits in 2015.
  • She knew when to cash out – she was able to sell 51% of the business she started with $250,000 for $600 million in 2018 (of which she took a post tax cash payout of $340 million).

One key attribute of astute investors is knowing when to accept a good offer and when to walk away. Given that sales of cosmetics are down globally, she was smart to sell majority of her business when she did.

  • Yes, the GDP grew 1.87% in Q1 2020 but is it enough?

Last week, the National Bureau of Statistics released the Q1 2020 GDP report.

The Gross Domestic Product (GDP)measures total monetary value of economic activities of a country.

Below are some of the highlights of the report:

  • This is the slowest growth in 6 quarters
    • It shrank from Q4 2020, due to falling oil prices and the corona virus pandemic. It was 0.68% lower than Q4 2019 and 0.23% lower than Q1 2019 (year on year)
    • The oil sector grew by 5.06% in Q1 2020 (6.36% Q4 2019) while the non-oil sector grew by 1.55% (a decline from Q4 2019 and Q1 2019 – 2.27% & 2.43% respectively)
    • The non- oil sector contributed 90.5% to total GDP (92.68% Q4 2019) while oil sector contributed 9.5% (7.32% Q4 2019).
    •  The communications sector which accounted for 14% of GDP, grew the most by 9.9% in Q1. The financial institutions, agriculture and construction sectors also grew.
    • Sectors like oil and gas, public administration, real estate and sale and retail trade contracted.   

In summary, whilst the economy grew in Q1, the Q2 2020 forecast is not rosy given that the country was in lockdown in April and full economic activities are yet to commence. The sectors expected to shrink are the oil and gas, transportation, hospitality, real estate and wholesale and retail trade.

As articulated last week, there are preemptive steps that can and should be taken to blunt the effect on our personal finances and businesses.

  • What are the implications of the reduction in the Monetary Policy Rate (MPR):

Last week, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) reduced the MPR from 13.50% to 12.50%. Before this reduction, the MPR had been retained at 13.5% for 14 months.

The MPR is the benchmark rate against which other lending rates in the country are fixed. It is also used by the CBN as an instrument to control inflation.

In his speech, the CBN Governor explained that this decision was due to the negative impacts the COVID 19 pandemic, rising inflation and reduced international trade transactions were having on the economy.

In simple terms, the CBN is signaling that lending rates should trend downwards. Whilst this is a welcome development for borrowers of funds especially Medium and Small Businesses; it has an adverse effect on savings rate.

This is being done to encourage economic activity (in sectors like manufacturing and trade) by making it cheaper for companies to access funds and is commendable.

However, for savers it is “double whammy” as the low rates and growing inflation will act as a discouragement.

It will however mean that savers will look for other outlets for their funds such as the stock market and fixed income instruments.

  • Some wrong mindsets about investing in the stock market:

The stock market is one of the recognized outlets for any investor. Historically, stock markets have provided one of the highest returns on investment – Warren Buffet is one clear example of this. Although, there are no clear examples in Nigeria, the Nigerian stock market has also made many investors wealthy.

Despite this, there are many investors who still shy away from dabbling in the stock market.

Below, we will be discussing some of these wrong mindsets people have:

  • Professional advice is always foolproof: Whilst professional advice is always encouraged, it does not always guarantee success. There is a need every investor to do their homework before investing in any recommended stock.
    • Many people equate investing in stock with gambling: this comparison is borne from the fact that the stock market can be volatile and unpredictable just like gambling. However, this is wrong because unlike in gambling where there is always a loser and winner; investing typically creates winners on both sides. The seller gets funds in return for the stock sold and the buyer creates an asset for his/her portfolio.
    • The stock market is for a select group of people (the wealthy): although shares are typically purchased through stockbroking firms (in Nigeria) who may have a minimum Naira limit; there is no restriction to the quantity and value of shares that can be purchased on the floor of the stock exchange.

Even though you do not need to have millions,it is advisable that your purchases should factor in the transaction costs which means that the higher the value, the less the cost per unit share.

  • Exit when the prices are falling: there is an erroneously belief that it is smart to cut one’s losses early by selling when markets crash. However, selling at that point ensures that there is a loss especially if there is a plan to buy the same shares later. This is because you will be incurring additional transaction costs as well as missing out on any gains to be made when the market recovers.
    • The best time to buy is when prices are going up: the fear of losing out makes many investors participate in the stock market when prices are on the upward trend. Unfortunately, these rallies tend to drive prices up and make shares more expensive (without even factoring transaction costs).

The reality is that shares are best purchased at bargain prices which occur when the markets crash and all stock irrespective of their business are trading at low prices.

  • Interesting fact:
    • $775 million – The estimated value (before taxes) of the first tranche of compensation due to Elon Musk from Tesla.

Currently Mr. Musk does not earn a salary from the company but is paid a compensation based on the achievement of several metrics such as revenue and market valuation.

This was achieved and based on that, he will be receiving 1.69 million at a set price of $350 per share. His payoff is based on the price differential between the market price and set price.

Analysts believe the payout would even have been more if his tweets had not caused the share prices to fall by 10% earlier in the month.

That notwithstanding, this has been a good month for the man given that another company of his – Space X successfully delivered 2 astronauts to space on May 30 (the first private company to achieve this feat).

Toyin Oguntuyi
Research Lead,
The Smart Investment Club

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