2008 In Review

The year 2008 is a year to forget for most investors on the Nigerian Stock Exchange (NSE). The All Share Index closed the year at 31,451 down 45.8% from its opening position for the year. Based on available data, this is the worst year for the Index between 1995 and 2008. Infact the loss suffered in 2008 is worse than the cumulative loss of 27% suffered between 1997 and 1999.

The All share Index went down for 10 consecutive months, also a record. The FSDH Banking Index was down 57%, the Insurance Index 54% and Manufacturing Index 43%. Only the Petroleum Marketing Index closed up 19%. Value of transactions also collapsed from an average daily figure of N18.5 billion in February to a paltry average of N2.2 billion in December. The most devastating loss was suffered in October as the Index lost 21% the worst decline in 13 years. It was not pretty all round.

The ASI reflected global trends. Most markets were down in 2008. The NSE was especially hard hit by regulatory incompetence and earlier excesses that led to serious over valuation of a large number of stocks.

One of the few positives one can take away from 2008 is the lessons learnt from the long drawn out bear market. The 12 lessons articulated by Brent Arends are worth heeding. They can be found at www.marketwatch.com/news. Here are some of the lessons I have learnt:

1) Cut your losses short. See my earlier post on this topic.
2) Liquidity is key. All bull markets are rooted in easy money. Once that disappears, chances are the market will commence a downward trend.
3) Be properly diversified across sectors. A portfolio composed of Banks and Insurance companies fared far worse than the ASI.
4) Be flexible in your analysis.
5) If you are a trader and the market shows a downward trend, stay out unless you can short.
6) You can underpay for a bad company and still never recover.
7) Avoid being trapped in bear psychology. Between 1995 and 2008, only four years ended down.
8) There is no such thing as a permanent hold decision. Sell when the fundamentals begin to deteriorate.

I look forward to 2009 with the hope that the worst is truly behind us. I cannot really imagine another year of 40%+ decline.