The 2008 Nigerian Stock Market Meltdown: Why Retail Investors Lost Money

Most Nigerians who invest in the stock market today are institutional traders and high net worth individuals. The institutional participants comprise mainly of pension funds, fund managers and the large cooperatives. Retail investors have more …

Most Nigerians who invest in the stock market today are institutional traders and high net worth individuals. The institutional participants comprise mainly of pension funds, fund managers and the large cooperatives. Retail investors have more or less abandoned the market and it appears that they are not in any hurry to come back. Not even some policies that have been put in place by the Securities and Exchange Commission and several enlightenment campaigns have been persuasive enough to attract the ordinary Nigerian investor to the local stock market.

The reason Nigerian retail investors have so much apathy for the stock market is easily understood when you consider the fact that a whole lot of people lost their life savings to the stock market as a result of the great crash. Nigerians have never experienced a market collapse of the magnitude that was witnessed in 2008. Driven by improved domestic economic conditions which characterized Nigeria’s return to democratic governance in 1999 and the reforms of the banking sector which encouraged banks to look to the capital market to source for funds in order to meet a new minimum capital requirement, there was a new wave of awareness about investment in stocks among Nigerians. Stock prices sky rocketed, reaching unprecedented high as more and more people across the investment divide approached the stock market to create wealth for themselves.

In March 2008, the market capitalization of quoted equities on the Nigeria Stock Exchange peaked at NGN13 trillion while the All Share Index was as high as 66,121.93 points emphasizing a decade of unprecedented growth. Unknown to many, stock prices had been overtly manipulated and overvalued to hoodwink unsuspecting investors who were driven by the profit objective. These unwholesome practices festered due to weak regulation and poor investor knowledge. However, a majority of people who had invested in the market did not understand the dynamics; they rode in the tide and eventually sustained heavy losses when the market collapsed later in the year.

Unfortunately this majority who lost money, some of them their life savings were retail investors. They were people who abandoned their small businesses to join the fray of speculators; some of them invested the whole of their severance benefits and pensions while a large number of others borrowed money from the banks under unbridled margin loan schemes that pervaded the landscape at the time. Unfortunately, when the Asset Management Corporation was established to help resolve the problem of toxic assets in the financial system, this category of investors were excluded because the volume attributed to this segment of the market was not considered very impactful on the larger economy. But the truth remains that many people in this category were rendered poor, many family ties got broken and their children’s education interrupted because of the losses they sustained from the capital market.

But why did they lose money? And could it have been avoided? Four reasons can easily be identified.

1. The first reason, I believe many Nigerian retail investors burnt their fingers was the lack of sufficient knowledge about how the stock market works. Many people came into the market with the idea that money could be made within a short period of time, for some, as short as two weeks. This short term mentality influenced so many people’s decision to invest without caution and due diligence.

2. One other reason people lost money was greed. People became so greedy that even when their investment had appreciated reasonably, they hold unto it waiting to make triple their investment. It is pathetic to know that the majority of people who were caught in the web were those who did not exit from certain stocks when they ought to do because they were expecting higher capital gains. Expert investors know that greed is a dangerous emotion to manage effectively if you desire to be successful as an investor in the stock market. The drive for above than normal returns drove many investors to go contrary to their investment goals where one existed and thereby invested on highly speculative equities.

3. Bandwagon effect: Because so many people did not even understand why they are playing in the market, nor had the basic knowledge of how the market works, they simply move with the tide of the market. Where investor A had made 50% capital gain in a stock within a short period of time, others simply gravitated to the investment without consideration to timing or asking the relevant fundamental and technical questions. Crowd mentality only work fairly where an investor is able to study and interpret prevailing market mood and also follow it up with entry and exit strategy that will ensure that his investment is not swept away by the tide.

4. Finally, many people failed to diversify their portfolio. Especially for retail investors, the sayings ‘don’t put all of your eggs in one basket’ is important. Diversifying your portfolio amongst different classes of investment or even within different sectors of the market provides a good hedge against market fluctuation. One easy way to diversify is by investing in mutual fund. Unfortunately, quite a good number of investors would rather put their entire investible fund in one stock they believe would appreciate reasonably in price. The implication of this is that when the market move contrary to expectations, you would have lost all your money.

What retail investors went through could have been avoided if there was sufficient investor education and if people were properly guided on the workings of the stock market. The event could have been better managed if people understood the basic principles of stock investing; if people knew that investing in stock was not the same as betting. Be that as it may, the meltdown has come and gone and the market has begun on an upward trajectory. If you had lost money during the period of melt down, it is time you counted your losses and move on. The stock market remains a veritable window for accumulating long term wealth and the opportunities are enormous for those who are patient enough to play by the rules.

Those who succeed in the stock market are people who have long term mentality, are committed to studying and analyzing market information and invest with long term capital formation in mind. The first thing you may have to do if you are considering returning to the market is to ensure that you choose to invest through a registered stockbroking company who has the capacity to provide you with as much market information as necessary to guide your investment choices.