Dr Ajibola Awolowo
The joy in my heart knows no bounds as I type this. The best football club in the world, Real Madrid, just won their 14th champions league title in grand style. I am a staunch supporter of this awesome football club and have been so for as long as I can remember. If you’re a Liverpool fan, know that I feel your pain. The hope for revenge and a quadruple fizzled out as soon as it was conceived. It is what it is. #RespectYourElders.
For me, the big news was not that we won the champions league, again. Rather, the spectacular thing was the way in which we won it. In the group stages, we squared up with Inter Milan, Shakhtar Donetsk and Sheriff Tiraspol. In the round of 16, we faced the state backed Paris St. Germain over two legs and won that tie in a spectacular fashion. Then came Chelsea football club, Manchester City football club and finally, Liverpool Football club.
It was as if the difficulty level kept increasing until the final match for us. I can safely say that this was the toughest run up to a champions league title any club has ever had.
It was only after the final that the reality hit me. To win the champions league trophy, all you have to do is qualify from the group stage, defeat the next three opponents over 2 legs and the last opponent in the final match. It does not matter if lose one leg in each of the round of 16, quarterfinal or semi-final matches. Just defeat them in the next leg and win on aggregate. Qualify from the group, defeat your next 4 opponents and you are the champions league winner.
Whether the four opponents you face happen to be clubs backed by infinite oil money or are minnows from unknown European Leagues, defeat them all and you’ll be a Champion. The run up to the final match makes no real difference. You will earn more plaudits and bragging rights for facing and defeating clubs from top European leagues. Other than this, it makes no difference. 32 teams start the tournament all vying for the trophy but only one team will achieve this objective.
The means does not justify the end. Whether your path was tumultuous or easy, the trophy remains the same. There are no extra points for difficulty in this game. In the same vein, we all approach the stock market with the aim of making a profit. It does not matter if the profit comes from buying Dangote Cement, Zenith Bank, Japaul Gold or Daar communications. 10% profit coming from Transcorp is identical to 10% profit from Seplat.
Don’t misinterpret me. All the companies listed on the stock exchange are not equal. Some are penny stocks while others have large capitalization. Some earn over one trillion naira in annual revenues while others do not even have a naira of revenue at all. Companies all have different inherent risks, operate in industries and have different likelihood of moving up or down in price at various times. However, a 10% loss or gain in all the various listed equities is identical. There is no extra benefit to be earned when one earns 10% from a large company as against earning the same from a semi-comatose company.
There is no advantage in trying to make profit from complex companies as that same effort will be better serve you in simple/ straightforward companies. There are no additional points for taking on difficult tasks asides the bragging rights and plaudits from other investors.
You can argue that the time invested in studying complex companies that have multiple subsidiaries pays off as you may be one of the few people who are willing to pay the price to identify a price/ value mismatch. This in turn may yield a higher possibility for profits once it becomes obvious to the crowd. You however need to realise the amount of risk you are taking when dealing with complexity. This increased risk can make the potential returns not worth the while.
If all profits and losses are identical, it will make sense for us to only concentrate our efforts on companies where we may have an advantage over other investors. In those situations, there is a limited downside risk and unlimited upside potential since we know those companies exceptionally well. This is equivalent to Real Madrid football club playing Shooting Stars of Ibadan, Gateway football club of Ogun, Enugu Rangers and El-Kanemi Warriors of Maiduguri in the knockout stages of the champions league. By doing this, Real Madrid increases their probability of winning the title while taking little risk in the process. Sometimes, it is best to choose the path of least resistance in as much as it leads to the same destination that a more complex path does.
As investors, we must ensure we only participate in games where we are at an advantage. Remember, there are no extra points for difficulty. You do not need to make money in the approximately 150 companies listed on the main board of the Nigeria Stock Market. Concentrate your effort on the few you truly understand in more details than the average investor.
If you are an electrician or sell electrical cables/ supplies, you will have unique insight into which company produces the best cables or which company’s products fly off the shelves faster than other.
To illustrate this, I’ll cite an example which I recall from about 8 years ago. I worked in a teaching hospital where the norm was to use imported and a select few locally manufactured intravenous fluids and medications. Gradually, I noticed a new entrant – Fidson Pharmaceuticals. The previously popular intravenous fluid brands were phased out over a few months and fluids/ Medications made by Fidson became the new normal.
This was a trend I noticed in the line of my job which had nothing to do with investing. Was the same trend going on in other hospitals? I could have called colleagues in other hospitals to see if they had noticed the same thing. At the time, this increased sale was not obvious in the financial statements of the company but I arguably spotted it prior to other investors. Unfortunately, I did not buy the company as a reason of this insight and ended up missing out on the over 300% returns the share price has returned since then.
With deep reflection, a large dose of curiosity and attention to details, we are all able to spot trends that support or disprove a particular company or an industry earlier than other investors. This information may come to you through your day job, as you do your shopping or as you interact with others. You may need to read a book about a company or industry which can give you an edge. Strive to become a specialist in a company or an industry. This immediately gives you an edge over the average investor.
Real Madrids’ successful champions league campaign also proves that you do not need to be right 100% of the time to get a positive outcome. In all, they played 13 matches, lost 4 matches (Sheriff Tiraspol, PSG, Chelsea and Manchester City) and won 9. You do not need to win all your matches to get the trophy. You just need to qualify from the group, win on aggregate scores in 3 of the 4 knockout matches and certainly, win the final match.
As investors, we do not need to make a profit on every single trade we place. If this is your aim, you have failed even before starting. Super investors such as Warren Buffett get things wrong 1/3rd of the time. Our aim should be to maximize gains when we are right and minimize losses when we are wrong. Often, we are quick to take profits but slow to cut our losers. We should rather be watering our flowers and plucking off the weeds. It takes discipline, patience and understanding of ones self/ process to do this consistently.
Even though calm seas do not make fine sailors, I suspect sailors would rather journey on calm waters all the time. If you have lived through a storm on the open sea, you won’t blame them. Taking the path of least resistance may not be a sign of laziness but a mark of timeless wisdom. Embrace it.
Dr Ajibola Awolowo can be reached via this email: [email protected]