Who invests and who gambles?
Investment in any asset class is a tradeoff of risk and return. It is settled in portfolio management that there are four major asset classes- cash and cash equivalents, equities, fixed income, and real estate. Apart from what is called systematic or undiversifiable risk, which is inherent to the entire market or market segment, each asset class has its peculiar risk. Risk appetite largely determines whether one is an investor, speculator, or a gambler.
An investor can be an individual or a corporate entity that commits money into a business with expectation of good return on in the form of capital gains, interest, dividend, premium, other pension benefits etc on a consistent basis. A smart investor works closely with a professional adviser to minimize risk and maximize return. A speculator invests in risky assets with eyes on a huge profit. But he does this with calculated risk.
However, a gambler puts money on a highly risky investment or bet a huge sum of money with an expectation of extraordinary profit. A gambler is ready to lose his entire money or property in expectation of unrealistic return. Investments that fall under gambling include casino, lotteries, horse trading, card games and bing
Some people, either for lack of knowledge or deliberate mischief, classify investment in stocks as gambling. This is incorrect. Many investors have got their fingers burnt for several reasons, including failure to seek investment advice from a stockbroker. Others are purchasing shares without investment objective, lack of knowledge of time horizon in investment, opaque knowledge of the company’s operations, corporate governance structure and competitive edge., Failure to understand one’s risk profile, investing short term fund in long term assets, called mismatch in corporate finance, investment based on herd instinct, just because many people are buying the stocks and misplaced ambition to get rich quickly amongst others.
Inevitable questions ahead of share purchase
There are questions that an investor cannot ignore before investing in shares, but those who invest in casino and other forms of ponzi schemes solely rely on unrealistic forecasts, designed to attract unsuspecting and overambitious investors.
Why would an investor want to be a shareholder in a blue chip quoted company without information on its size, fundamentals, such as the price-to-earnings ratio, debt-to-equity ratio and book-to value ratio, company’s stock performance compared to its peers, shareholder pattern, any mutual fund holding, dividend history, revenue growth, volatility record and the extent to which external shocks such as political unrest, economic dislocation, unfavourable government policy, emergence of pandemic, energy crisis and a host of others can impact negatively on the company’s top and bottom line?
Stockbrokers as investment doctors
This is where securities professionals commonly called stockbrokers become gatekeepers. These professionals keep tab on all the sectors of the economy. They do many analyses before recommending buy, sell or hold to an investor. Stockbrokers are not God.
A sudden occurrence can negate their analysis, but they encourage their clients to diversify holdings as a hedge against unforeseen risks. The processes and procedures for investment in shares show that it is not gambling. It is an investment with calculated risks and there are mitigants. Anyone who loses his life savings to investment in shares must have breached the due process of investing or been duped by a con man.
Averting fake investment advisers
Certified stockbrokers and the companies they work for are highly regulated by the Nigerian Securities and Exchange Commission (SEC) and they can be sanctioned by professional bodies, such as the Chartered Institute of Stockbrokers (CIS) and Association of Securities Dealing Houses of Nigeria (ASHON).
A list of individuals and corporate members in good standing can be confirmed from these institutions. Investors should contact stockbrokers at every stage of their investment decision. Those who understand the market make money throughout the year. Whether bearish and bullish run, it is a market for all seasons.
Are there risk-free Investments?
In corporate finance, the Federal Government bond is ranked as the safest and therefore risk-free. This is premised on the fact that it is ‘backed by the full faith and credit of the government ‘. The perception is that the bonds have no default risk. The income on the bond is exempted from State and local government taxes. The bond is called gilt edge.
However, the risk-free attribute of the bond is flawed by its associated risks. The bond is not insulated from inflation risk, exchange rate risk, interest rate risk, reinvestment risk, liquidity risk and even default risk. Argentina, Ecuador, Lebanon, Ukraine, and Venezuela had defaulted in sovereign debt at one time or the other after all.
Share prices can fall significantly in a volatile market. Volatility may be prompted by bad news from the company, such as announcement of poor earnings, controversial government policy or any other external events beyond the control of a company. However, share diminution is also a buy signal for companies with strong fundamentals. Stock markets operate on self-correction, based on certain variables, hence, after a while, the share price will bounce back to its fair market value.
However, it takes those who understand market psychology to take advantage of occasional price swings. Shareholders suffer credit risk when a company goes under, leading to asset stripping. The law provides that the shareholders can only be considered after taking care of the company’s creditors. There is no investment that is risk-free. But gambling is the mother of all risky investments. Gamblers often lose everything.
*** Sola Oni is the Chief Executive Officer, Sofunix Investment and Communications
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