When It Come To Stocks, Forget About Monthly or Yearly Returns

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image: marvingermo.com

One question I get asked a lot is: "Michael, that your stock investment, what is the rate of return?" They are always disappointed with my answer.

I have been invested in the stocks market consistently for the last six years and I can't really say I have gained more than I put in, money-wise. My investment knowledge has skyrocketed but the money has stayed flat. I made some losses, made some gains; in the end they evened out.

It is appropriate to compare one savings account to another by the interest rate they give you. It is even appropriate to compare bonds and money market investment account based on the monthly increase you see on top of your original investment amount. But with stocks, it is not appropriate.

And in a country like Nigeria, things are even much worse for the person seeking a stable return rate for his stocks investment. For the last ten years the market has lost more than it had gained for investors. I remember in 2007 when I was an ardent reader of the stocks report page of Punch newspaper. I used to see market capitalization at 12 trillion naira. Today, Ten years later, it is less than 9 trillion naira. A whooping 3 trillion naira plus have been wiped off. A gigantic loss for investors; that's like 25% loss. That's the equivalent of putting 1 million naira in an investment account in 2007 and today you find that it has just 750,000 naira. 250,000 naira wiped off. And to make matters worse, every other thing has been rising in price. From price of house to price of car to price of bread and to price of coca-cola.

In fact, I have been lucky to have evened out.

On the contrary, if you had put your money in Federal Government T-Bills or a money market fund that accurately tracks it, you would have seen you money more than doubled within that same time period. Your 1 million naira in 2007 will now be more than 2 million naira. And that is some scary anomaly, T-Bills are called risk free and expected to deliver the lowest rate of return over a long time period especially compared to stocks. But in our dear Nigeria, logic is a laggard. 

Yet the reality is that stocks will always outperform the other investments -- real estate, savings and bonds. I know that not many people will agree with the real estate part. But here is the abridged logic behind it. The very land that is growing in value is also owned by the companies you buy on the stock exchange, and they don't just sit and wait for it to double in price. They make more productive use of it to generate ongoing income/profit than even the real estate guy. Imagine comparing the profits of an estate agent with that of a bank. For sure the banks make more from their land assets than the guy who rents house to people. 

The big trouble here is that the reality doesn't have a time tag. It is like the quote about a lie going round the world before the truth is able to get his trouser on. Here, reality can take, as we have seen, more than a decade to surface.

In summary, the stock market is more for people who can have the patience to wait out the years of anomaly. And it starts with forgetting about a guaranteed rate of return or even yearly return. You just have to trust that logic will catch up and the reality we all read in the books will come to pass. If it is too much of a work, then please stay off the Nigerian Stock Market.


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