Cheap Price vs. Good Value: The Stock Market Mistake Most Nigerian Investors Make

FUND MANAGER SERIES: THE PARAMOUNT FUND (EQUITY) · NOTE 3/5 

Cheap Price. Or Good Value? 

Price and value are two very different things. Confusing them is one of the most expensive mistakes an investor can make. 

Favour Tewogbade  ·  Chapel Hill Denham Management 

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Nigerians are some of the sharpest negotiators in the world. Walk through Balogun market, Onitsha main market, Wuse market, or any major market in the country and you will see it, the quick mental maths, the counter-offer, the walk-away that almost always brings the seller back. We know how to find value. 

But transfer that same instinct to the stock market and something goes wrong. On the market, we see a stock at ₦8 and another at ₦500, and the ₦8 one feels like the bargain. It rarely is. 

The difference between a cheap price and good value is the most important thing this note will teach you. 

WORD TO KNOW - NGX: Valuation: What a company is actually worth compared to what you are paying for it. A share price tells you the cost. Valuation tells you whether that cost makes sense. Two completely different things.

 

Two Fabric Sellers. One Price That Makes Sense. 

Picture two fabric sellers in Balogun market. The first sits at the front of the market, surrounded by forty other sellers all competing for the same customers. If she prices too high, the next stall gets the sale. Her price is honest because the market forces it to be. 

The second seller is tucked away at the back where foot traffic is thin. Maybe five customers a day. No competition nearby. She can charge what she likes not because her fabric is better, but because nobody is there to challenge her. Is her higher price a sign of quality? No. It is a sign that the market has not tested it. 

This is exactly how share prices work on the NGX. Companies whose shares trade in high volumes every day have prices kept honest by thousands of buyers and sellers. Companies whose shares barely trade can stay expensive indefinitely not because the business is worth more, but because no real market exists to correct the price. 

Here is the surprising part:  Nigeria's largest, most recognisable companies are often the most reasonably priced. It is the small, obscure stocks, the ones that barely trade, that frequently carry the most inflated valuations. 

Why the 'Cheap' Stock Is Often the Expensive One 

Think about it this way. A stock that barely trades has almost no buyers and sellers. So who sets the price? In practice, nobody, it just sits where it last traded, weeks or months ago, with no real market to challenge it. That price might look low in naira terms. But measured against what the company actually earns or owns, it can be expensive. 

Meanwhile a stock like GTCO or Zenith Bank trades millions of units every single day. Thousands of informed investors, people who have read the accounts, done the maths, and are risking real money, are constantly agreeing on a price. That price reflects reality much more accurately. 

Professional investors call this price discovery: the process by which a fair price is found through real buying and selling. Without it, a stock's price is little more than a number on a screen. 

WORD TO KNOW - Value Trap: A stock that looks cheap because the share price is low, but is actually expensive relative to what the business earns or owns. It is one of the most common traps on the NGX and one of the hardest to recover from once you are in it. 

The Paramount Principle  We only invest where valuation is supported by real buying and selling activity. If nobody is actively trading a stock, the price on screen tells you very little about what it is actually worth. 

FROM THE FUND MANAGER 

"The Nigerian market regularly misprices companies. We look for that gap, but only where the price is set by a real market, not by the absence of one." 

 

What to Take From This Note 

→  A low share price does not mean a stock is cheap. Value is what you get for what you pay, not the number on the screen. 

→  Shares that trade actively every day have honest prices, kept in check by thousands of real buyers and sellers. 

→  Thinly traded stocks can look cheap in naira terms but be wildly expensive relative to what the business actually earns or owns. 

→  Nigeria's largest, most liquid companies are often the most reasonably priced, which is the opposite of what most retail investors expect. 

→  Before you buy because a price looks low, ask yourself: is this genuinely good value, or is it just a number nobody has tested in a while? 

The Paramount Principle  Free float is the gateway to liquidity, and liquidity is the gateway to investibility. If a company cannot pass this test, we do not invest, regardless of how attractive the business looks on paper. 

 

💬  YOUR TURN: QUICK QUIZ 

Two stocks. Company A is ₦400 per share, actively traded daily, owned by a large institution. Company B is ₦12 per share, barely trades, held mostly by the founding family. Which is more likely to be genuinely good value? 

☐  Company B — ₦12 is much cheaper than ₦400 

☐  Company A — active trading means the price reflects reality 

☐  They are the same — share price is the only thing that matters 

☐  Cannot tell from the information given 

Drop your answer in the comments below 👇🏾 

 

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IMPORTANT NOTICE 

This document is issued by Chapel Hill Denham Management Limited, registered with the Securities & Exchange Commission, Nigeria (SEC), and fund manager of the Paramount Fund (Equity). It is for informational purposes only and does not constitute investment advice or an offer to buy or sell units of the Fund. Past performance is not a guarantee of future results. 

 

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