Buying to the Sounds of Cannons
Reading about the jumbo 1.5 Billion Pound profit made by the Abu Dhabi based International Petroleum Investment Company ("IPIC") under the leadership of Sheikh Mansour Bin Zayed Al Nahyan (pictured on the left) on an investment made in Barclays Bank Plc in October 2008, I was reminded of a rather apt quote. Nathan Rothschild (one of the founding sons of the illustrious Rothschild banking family and a notable financier and speculator) was said to have remarked that his investment strategy was to “buy to the sound of cannons and sell to the sound of trumpets”.
Nathan Rothschild must have been referring to the various wars that plagued European kingdoms during his day and the tendency for shares and bonds to crash deeply during wartime and rise spectacularly in times of peace and prosperity. While nation states are less prone to war in this age than they were during Nathan Rothschild’s lifetime, the modern age has its own parallels to the “sound of cannons” of the 19th Century in the form of stock market failures and credit crises. While Nathan Rothschild bought British Consols (i.e. a Government Bond variant) which had become undervalued and oversold during the battle of Waterloo by a skeptical (some might even say paranoid!) investing public and later made a killing from his position when victory was attained and investors’ fears turned out to be unfounded. So also Sheikh Al Nahyan has made a ton of money, after only 9 months, as a result of having the wisdom (and above all the guts) to invest in Barclays Bank when most other investors thought that the sky was falling; the global financial system was headed towards oblivion and that we would abandon modern finance and go back to trade by barter. The IPIC has sold its nearly 12% stake in the bank to, largely, the same class of investors who would not invest in the Bank at less than half the price about nine months earlier.
History has so often taught us that the best opportunities present themselves at times of great danger and uncertainty and that those investors who are willing to take calculated risks are likely to make huge gains. These scenarios also play out in investment opportunities related to Nigerian companies and investment opportunities, with Guaranty Trust Bank Eurobonds being a case in point. In the aftermath of the Lehman collapse (around November last year) GT Bank Eurobonds were trading at Yields To Maturities of between 27-28% on the international markets after being issued at Yield to Maturity of about 8.5% less than 2 years before. That the yields on the debt of a bank that was in no grave danger would widen by such a margin is quite ridiculous, especially when viewed against the fact that the Bank had minimal exposure to margin loans; next to zero exposure to complex derivative products and has maintained a conservative lending policy and healthy Net Interest Margins. A really smart investor would have bought the bonds at those yields (at an implied price of about 60 Cents per US$1 of face value) with a very high probability of being made whole at maturity, as the fundamentals of the bank remain unchanged and are more likely to be enhanced by the recent minor shakeup in the Nigerian Banking industry. As at the time of my writing this post, the Yield to Maturity for the bonds had narrowed to 17% and market value increased to about 81 Cents per US$1 of face value.
The Nigerian equities market also tell a similar tale, the Nigerian Stock Exchange’s All Share Index shed 30% of its value in January of 2009 alone and by the end of March the Index was down by 37%, prompting investors to dump their shares and leave the market in huge numbers. However, with the benefit of hindsight, these periods presented wonderful buying opportunities and were in essence our own “sounds of cannons” and should have been a cue for savvy investors. Since the trough of the Index on the 26th of March, the All Share Index has gained about 50%!. While the markets are essentially flat on a year-to date basis, many investors with the foresight (and I must say: courage!) to invest during the first quarter of the year have achieved returns (in certain stocks) of between 50-100% and have started to unload their shares at a profit during the recent rally (i.e. “sound of trumpets”!).
