Updated: My Investment Strategy

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If you live in Nigeria and earn your income in Naira, one big enemy you have is inflation. What one million naira bought five years ago now sells for two million naira. But the same one million naira left in a regular Nigerian bank savings account for the last five years will be about 1,174,000 naira.

And it gets worse when you project this over 20 or 30 years. You retire and find that your retirement savings which is 20% of your salary all throughout your 35 years of active work is now not enough to enjoy a comfortable life after retirement. Inflation has laid its corrosive hands on it.

Nigeria Inflation Rate from 2007 to 2017 (source, Bloomberg)

It is against that backdrop of high inflation rate and almost forever weakening Naira that I have carefully thought out my investment strategy.

When I began my investment journey, I made the classic mistake of thinking that what applied in the US markets, upon which all the investment books I read were built on, directly applied to the Nigerian markets. I even took seriously Jim Cramer's advice, in Jim Cramer's Real Money: Sane Investing in an Insane World, on how to time the market by analysing trends and technical signals. I thoroughly enjoyed reading Phil Town's Rule #1. I read many other popular books on investing.

They gave me a lot of theoretical knowledge and real-world use cases but no practical result. I couldn't apply most of what I learned due to the under-developed nature of our financial markets and the huge information asymmetry. Ultimately, I had more losses than gain until I changed my perspective.

For a global investor, Nigeria is a frontier market. One you don't put all your investments in except you are a private equity fund manager with focus on frontier markets. And I have just as much return expectation from my investments as any global investor would. Why then should I put all my investment in the highly volatile Nigerian financial markets?

The moment I took on the perspective of a global investor, I began using an asset class investment strategy. I invest in US markets, hedging both my inflation and weakening Naira risks. I switch between stocks, bonds and Gold depending on which is relatively undervalued. Currently US stocks are overvalued and trading at historical high P/E ratios. Last year December, I moved out of US stocks into bonds and emerging market index fund. Some analysts say it is more advisable to move to Gold rather than bond as the US interest rate hikes will damage bonds. That would be valid if I was buying long term bonds.

Then I have the remainder of my investments in the Nigerian markets, between our stocks and the money market. Currently, I am 95% stocks versus 5% money market for that remainder. The reason is that stocks are hugely undervalued. I don't mind losing out of the high return rates on the money market, I will patiently wait for the rally in the stocks market.

And as per the stocks I am invested in, besides the money I have in ARM Discovery Fund which I opened in my early investing days and occasionally keep funding due to the better-than-peers returns they make, I am invested in three companies on the Nigerian stock exchange (NSE): Nestle, First Bank and Mobil. I avoid companies with low trading volumes or in the penny-stock category and focus on the market leaders in non-correlated industries.

Why Nestle?
Nestle has the best fundamentals of all the major manufacturing companies in Nigeria. 

Up until the FX issue affected its profit last year, it was the perfect company for a long term investor. Now it is highly priced (has one of the highest PE) but it is due to an exceptional issue so I am not perturbed. Also I have the institutional wind in my favour, going through all the foreign Exchange Traded Funds with investments in the NSE, the only companies I have seen them invest in besides the banks are Nigerian Breweries, Dangote Cement and Nestle.


Why Mobil?
The downstream oil sector has historically proven to be inflation proof and, more recently, recession proof. The industry has been growing with the increased economic activities (GDP) over the years. It is the only industry that didn't get bashed seriously by the NSE crash (2008 till now).

I had made up my mind to invest in the best in the industry. Two companies were heads and shoulders above the others: Total Nigeria and Mobil Nigeria. Total is bigger by revenue. I went with Mobil because Mobil had the best fundamentals. Best ROI and most efficient in the industry. It is the GTBank of the Oil industry. Luckily, NIPCO acquired it and lead to a good bump in its price. Now it may not be attractively priced compared to Total.


Why First Bank?
This was a tough investment choice. GTBank has all the fundamentals and investors' love. However, the things about the banking and finance industry is that total assets is the strongest metric. Not even profit. The industry is so regulated that there is very little creative exploits Nigerian banks are allowed to make. The biggest differentiator in the long-run is total assets available to play with. And First Bank is the biggest bank in Nigeria by assets.

Unfortunately, it seems most investors are not factoring that in and have greatly discounted the oil industry loan exposure of the bank and other recent happenings that are temporary to bring very low the bank's share price. I bought it mainly because it gives the most potential value among the big four banks. I avoid industry minor players.