Economy
Are Stop Losses for Wimps?
By Steve Brice
When I started out in banking, I was based in a dealing room advising traders on potential positions to take. The positions were focused and generally very short-term in nature. Therefore, risk management was not a ‘nice-to-have’, it was vital to job security. When entering a trade, a stop-loss – a level at which the position taken would be unwound if it was losing money – was a must.
It was against this backdrop that a former colleague quipped that ‘stop-losses are for wimps’. He was of course referring to certain stocks in his portfolio which had fallen dramatically – he was probably justifying to himself why he should keep it! However, it raises an interesting question: Should we employ stop-losses when we invest?
While many people will be very passionate about this topic, as with most things in life, context is key. If you think about it, the existence of the stop-loss is a hedge against the fact that nobody knows what is going to happen and therefore you need to build in a circuit-breaker to avoid the behavioural biases that come with a loss-making position – the ostrich, or ‘head in the sand’, syndrome.
So, how does this translate for an average investor? I would argue that there are two dimensions to consider: the nature of investments being discussed and your time horizon. Let’s take each in turn.
I have a much greater conviction level that a diversified ‘foundation’ allocation (which includes exposure to different asset classes such as stocks, bonds, gold and private assets), or even a diversified equity portfolio, is more likely to rise over a given period of time than any individual stock.
The reason is simple. Different asset classes have different drivers and hence are usually uncorrelated in their moves. Therefore, just combining them into a portfolio smooths out the bumps and increases the probability of positive returns for the portfolio as a whole.
When it comes to the stock market, there are also different drivers that determine equity market or individual stock returns, but let’s simplify them into broad market drivers and idiosyncratic drivers. If the economy enters a recession, then most stocks will fall sharply in value. However, a company’s failed product launch will largely hit one stock, and those of a few of its suppliers. Its impact on the overall market will be much less severe.
This brings me to Principle Number 1: The broader the investment, the less likely a stop-loss is warranted and that a buy on dips approach makes sense.
A very good friend of mine recently questioned how applicable this ‘buy on dips’ approach was to stock markets outside of the US. So, we ran the numbers for some major global and Asian markets in terms of probability of positive returns over different time horizons and the potential size of returns for investors. The results are pretty interesting.
First, the historical probability of positive equity market returns across any given 12-month period, at around a two-thirds probability, is generally similar across major global or Asian indices – China is an outlier at just 55%. If you extend your time horizon to 5 years, this probability generally increases to around 80% – the outliers are Japan’s TOPIX (66%) and India’s Sensex (92%).
Second, we looked at what has happened after a 10% or 15% market pullback. Focusing on the 1-year time horizon, we can break the countries into 3 groups:
1) either the probability of positive returns or size of average return or both have increased significantly after a market sell-off. Markets that fall into this group include the US, Germany, UK, India.
2) there is no material change in either variable. This includes Hong Kong, Malaysia and Korea. Once you lengthen your time horizon to 5 years though, they all move into the first group.
3) the probability of positive returns or their average quantum actually declines after a sell-off. Japan and onshore China markets fit into this group. On a 5-year time horizon, China also moves into the first group but, interestingly, Japan stays firmly in group 3.
Hence the conclusion is: outside of Japan, the ‘buy on dips’ mantra has made sense, especially when held by long-term investors.
The above analysis highlights the importance of the last factor: time horizon. The dealing room environment generally takes narrow exposures over a very short time horizon. Thus, stop-losses are crucial. However, I believe the message for the average investor is the reverse as long as they are focused on a diversified foundation allocation with a long-term focus.
Structural thematic investments also potentially fall into this category. The longer your time horizon, the more likely your investment is to generate positive returns as long as the structural fundamentals remain supportive. Here, again, instead of a stop-loss being appropriate, market declines offer an opportunity to add to longer-term thematic positions given the likelihood that declines will prove temporary.
Principle number 2: The longer your time horizon, the less desirable a stop-loss is, especially for diversified allocations or long-term structural themes.
Thus, for investors who are trying to trade the market and pick stocks, we believe a strict risk management framework including the use of stop-losses is absolutely critical to returns. However, we believe the majority of investors would be much better served by building a foundation allocation with a ‘buy on dips’ approach. Investors can systematise this ‘buy on dips’ approach through regular portfolio rebalancing – say at least once or twice a year and especially after major market dislocations to bring their allocations back to their desired risk tolerance. Such rebalancing is akin to an investor systematically “buying low and selling high” – a win-win proposition. For these investors, stop-losses are likely to get in the way of wealth accumulation.
Steve Brice is Chief Investment Officer at Standard Chartered Bank’s Wealth Management division
By Aduragbemi Omiyale
The ban on the export of raw shea nuts from Nigeria has been extended by one year by President Bola Tinubu.
A statement from the Special Adviser to the President on Information and Strategy, Mr Bayo Onanuga, on Wednesday disclosed that the ban is now till February 25, 2027.
It was emphasised that this decision underscores the administration’s commitment to advancing industrial development, strengthening domestic value addition, and supporting the objectives of the Renewed Hope Agenda.
The ban aims to deepen processing capacity within Nigeria, enhance livelihoods in shea-producing communities, and promote the growth of Nigerian exports anchored on value-added products, the statement noted.
To further these objectives, President Tinubu has authorised the two Ministers of the Federal Ministry of Industry, Trade and Investment, and the Presidential Food Security Coordination Unit (PFSCU), to coordinate the implementation of a unified, evidence-based national framework that aligns industrialisation, trade, and investment priorities across the shea nut value chain.
He also approved the adoption of an export framework established by the Nigerian Commodity Exchange (NCX) and the withdrawal of all waivers allowing the direct export of raw shea nuts.
The President directed that any excess supply of raw shea nuts should be exported exclusively through the NCX framework, in accordance with the approved guidelines.
Additionally, he directed the Federal Ministry of Finance to provide access to a dedicated NESS Support Window to enable the Federal Ministry of Industry, Trade and Investment to pilot a Livelihood Finance Mechanism to strengthen production and processing capacity.
Shea nuts, the oil-rich fruits from the shea tree common in the Savanna belt of Nigeria, are the raw material for shea butter, renowned for its moisturising, anti-inflammatory, and antioxidant properties. The extracted butter is a principal ingredient in cosmetics for skin and hair, as well as in edible cooking oil. The Federal Government encourages processing shea nuts into butter locally, as butter fetches between 10 and 20 times the price of the raw nuts.
The federal government said it remains committed to policies that promote inclusive growth, local manufacturing and position Nigeria as a competitive participant in global agricultural value chains.
By Adedapo Adesanya
The NASD Over-the-Counter (OTC) Securities Exchange expanded for the first session this week by 1.27 per cent on Wednesday, February 25.
This lifted the NASD Unlisted Security Index (NSI) above 4,000 points, with a 50.45-point addition to close at 4,025.25 points compared with the previous day’s 3,974.80 points, as the market capitalisation added N30.19 billion to close at N2.408 trillion versus Tuesday’s N2.378 trillion.
At the trading session, FrieslandCampina Wamco Nigeria Plc grew by N5.00 to trade at N100.00 per share compared with the previous day’s N95.00 per share, Central Securities Clearing System (CSCS) Plc improved by N4.18 to sell at N70.00 per unit versus N65.82 per unit, and First Trust Mortgage Bank Plc increased by 14 Kobo to trade at N1.59 per share compared with the previous day’s N1.45 per share.
However, the share price of Geo-Fluids Plc depreciated by 27 Kobo at midweek to close at N3.27 per unit, in contrast to the N3.30 per unit it was transacted a day earlier.
At the midweek session, the volume of securities went down by 25.3 per cent to 8.7 million units from 11.6 million units, the value of securities decreased by 92.5 per cent to N80.7 million from N1.2 billion, and the number of deals slipped by 33.3 per cent to 32 deals from the preceding session’s 48 deals.
At the close of business, CSCS Plc remained the most traded stock by value on a year-to-date basis with 34.1 million units exchanged for N2.0 billion, trailed by Okitipupa Plc with 6.3 million units traded for N1.1 billion, and Geo-Fluids Plc with 122.0 million units valued at N478.0 million.
Resourcery Plc ended the trading session as the most traded stock by volume on a year-to-date basis with 1.05 billion units valued at N408.7 million, followed by Geo-Fluids Plc with 122.0 million units sold for N478.0 million, and CSCS Plc with 34.1 million units worth N2.0 billion.
By Dipo Olowookere
The bears consolidated their dominance on the Nigerian Exchange (NGX) Limited on Wednesday, inflicting an additional 0.09 per cent cut on the market.
At midweek, the market capitalisation of the domestic stock exchange went down by N73 billion to N124.754 trillion from the preceding day’s N124.827 trillion, and the All-Share Index (ASI) slipped by 114.32 points to 194,370.20 points from 194,484.52 points.
A look at the sectoral performance showed that only the consumer goods index closed in green, gaining 1.19 per cent due to buying pressure.
However, sustained profit-taking weakened the insurance space by 3.79 per cent, the banking index slumped by 2.07 per cent, the energy counter went down by 0.24 per cent, and the industrial goods sector shrank by 0.22 per cent.
Business Post reports that 25 equities ended on the gainers’ chart, and 54 equities finished on the losers’ table, representing a negative market breadth index and weak investor sentiment.
RT Briscoe lost 10.00 per cent to sell for N10.35, ABC Transport crashed by 10.00 per cent to N6.75, SAHCO depreciated by 9.98 per cent to N139.35, Haldane McCall gave up 9.93 per cent to trade at N3.99, and Vitafoam Nigeria decreased by 9.93 per cent to N112.50.
Conversely, Jaiz Bank gained 9.95 per cent to settle at N14.03, Okomu Oil appreciated by 9.93 per cent to N1,765.00, Trans-nationwide Express chalked up 9.77 per cent to close at N2.36, Fortis Global Insurance moved up by 9.72 per cent to 79 Kobo, and Champion Breweries rose by 5.39 per cent to N17.60.
Yesterday, 1.4 billion shares worth N46.2 billion were transacted in 70,222 deals compared with the 1.1 billion shares valued at N53.4 billion traded in 72,218 deals a day earlier, implying a rise in the trading volume by 27.27 per cent, and a decline in the trading value and number of deals by 13.48 per cent and 2.76 per cent, respectively.
Fortis Global Insurance ended the session as the busiest stock after trading 193.7 million units for N152.7 million, Zenith Bank transacted 120.7 million units worth N11.1 billion, Japaul exchanged 114.8 million units valued at N407.0 million, Ellah Lakes sold 98.4 million units worth N999.2 million, and Access Holdings traded 63.1 million units valued at N1.7 billion.
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