Warren Buffett, a billionaire and one of the most successful investors of the twentieth century, was once asked about what made him so much more successful than the rest of the market. Steve Forbes, the interviewer, enquired, “What makes you different? In investing there are a lot of bright people. They’ve all claimed to have read Graham and Dodd. They’ve all claimed to be disciplined, and yet there’s only one Warren Buffett.”

Buffett first started by mentioning that, unlike many people, he was lucky in that he found his passion. Then, he changed gears and talked about an internal quality that truly made him unique: “You don’t need a lot of brains in this business…What you do need is emotional stability. You have to be able to think independently and when you come to a conclusion you have to really not care what other people say.”

There are dozens of books published every year about how to get rich off the stock market. All of these books teach slightly different methods and investing approaches. They all claim to be able to teach people how to invest – or the process behind investing. The truth of the matter is, these books all say something very similar: buy low and sell high. What investors really need to learn, aside from different investing methods and styles, is the emotional stability Buffett credits with his success. One of the best sources for this stability can be found in the ancient philosophy of Stoicism.

Stoicism was founded in Athens, Greece by Zeno of Citium toward the end of Ancient Greece in the 3rd century BC. Like many Greek ideas and values, it flourished in the Roman Empire, and was most famously practiced by Seneca the Younger, a wealthy banker and advisor to the emperor Nero; as well as Marcus Aurelius, Rome’s emperor from 161 to 180 AD.

Stoicism asserts that “virtue” – or happiness – is achieved after a person identifies and accepts what is within and what is outside of one’s control. The Stoics accepted that life was very difficult. Hope had no place in Stoic philosophy and was actually frowned upon by its practitioners. The Stoics took a more indirect path to happiness. They believed that happiness was achieved when no external events could impact one’s internal state of mind and emotions. As Marcus Aurelius wrote in his Meditations, “You have power over your mind – not outside events. Realize this, and you will find strength.”

The strength Marcus refers to is meant to sustain a person as they endure life’s difficulties. In his own life, Marcus used Stoicism to remain calm, content, and gracious even as he had to deal with constant wars on the edges of his empire on top of the struggles of being the emperor of Rome. Similarly, investors can benefit from Stoicism the same way Marcus Aurelius and Seneca did: by having a framework to process, understand, and deal with the emotional aspects of investing that could get in the way of profits.

In order to do this, investors first have to understand that controlling emotions in the market is difficult, in the same way the Stoics understood that life in general is difficult. In today’s online world, investors have to deal with a variety of different opinions on where a stock is going, where the market is going, and what they should buy, hold, and sell. The amount of advice is overwhelming and there are so many differing opinions about the future that it is hard to discern which viewpoints have merit and which do not. Naturally, many market predictions do not come true, and investors suffer losses as a result.

The Stoics, though, can help in dealing with this situation. According to the Stoics, no one can control the opinions of other investors or pundits. An individual investor can only control his or her perception, analysis, and thought process. Naturally, that is all that should be trusted.

Stoicism also helps investors deal with one other thing: fear. The fear of losing money is something all investors have to deal with, no matter their track record. There is never a one hundred percent guarantee that a certain investment will work out, and it is natural to fear the consequences of an uncertain future. Stoicism advocates for acceptance in the face of fear.

As Alain de Botton, a philosopher and advocate of Stoicism puts it, “The Stoics advised us to take a different path. To be calm, one has to tell oneself something very dark: It will be terrible… but one must keep in mind that one will nevertheless be okay.” Stoics found boldness and courage in the realization that, in the end, they will be okay.

Any and every investment could fail. However, it is important to understand and accept that one will be okay despite what could happen as long as a trusted strategy is followed with discipline. As billionaire hedge fund manager Seth Klarman put it, the qualities of a successful investor include “the arrogance to act, and act decisively, and the humility to know that you could be wrong.” As long as investors focus on the facts and think independently, there is no reason to be terrified of fear. All they need to do is accept that they cannot always be right and move forward.

There are many different approaches to investing. Each one claims to offer the best way for investors to evaluate a company and the market. What is arguably more important than a particular approach, though, is the mental and emotional stability of an investor. To some investors – Warren Buffett being one of them – this kind of stability comes naturally. Others have to work harder and be more diligent. The best way to achieve this is to have a way of thinking – or a philosophy – as a guide. For investors, Stoicism, despite its ancient origins and sometimes depressing tone, offers the best chance for achieving this necessary stability.

Art Valuation

In the world of venture capital, there exists a special class of startups that attracts the attention of investors from nearly all backgrounds: Unicorns. These firms consist of private startups that are worth at least one billion dollars. The taxonomy goes further in order to identify the truly massive startups called “decacorns,” referring to their valuations in excess of $10 billion. Companies like Uber, Snapchat, AirBnb and SpaceX are among the best-known unicorns.
Conversations about the size of the valuations seem just as ubiquitous as the companies themselves. Headlines read of Uber’s $62 billion valuation, which easily surpasses Ford’s $50 billion market capitalization, and of AirBnb’s $25 billion valuation, which similarly trumps Hilton Group’s $22 billion market capitalization, despite having only eight percent of its revenue. In response to these astonishing sums, skeptics reverse engineered the growth expectations via traditional valuation techniques and found that, with astonishing frequency, unicorn valuation depends purely on optimism. Optimism, however, is not a new element in Silicon Valley’s expectations or in inflated valuations. The cause for this trend in inflating valuations is best explained by the changing nature of venture capital as it pertains to unicorns, and as a consequence, it is clear that valuations do not attempt to represent concrete value.

New considerations have been included into the valuation calculus. Average funding round size has increased dramatically in recent years, with some suggesting that “Series A round is the new Series B round,” referring to the notion that funding typically increases in each successive round. Over the course of 2014, average Series A funding rose 6 percent, Series B rose 20 percent, Series C rose 31 percent and Series D rose an astounding 100 percent. The increase in Series D funding picks up on a new strategy used by technology companies like Uber, in which mature companies stay private for longer and sustain operations with large, late-stage funding. Indeed, part of the inflation trend is due to the prestige of unicorn status itself, which is evidenced by the fact that Fortune Magazine lists just fewer than 100 companies that have valuations of one billion dollars, out of a total of 229 unicorns. CEOs and investors may see a startup’s unicorn valuation as a way to legitimize the company, attract new talent and over time, justify the overly ambitious valuation. Another part of the valuation inflation is due to the popularity of “downside protection provisions” as elements in funding agreements that shield investors from risk. For example, senior liquidation preferences are one common downside provision, and specify that an investor has its investment returned before other preferred stock or common investors should the company be liquidated. Another common downside protection is a provision that guarantees an investor additional shares if the company raises funds based on a lower valuation, thereby preserving the value of the investor’s stake in the company. Such stipulations have been increasingly popular as a method to shield against risk from investors, which consequently frees investors to make larger investments. As a result, it is clear that the inflation seen in valuations of unicorns represents the fact that the valuations are not pricing risk accurately.

Notable individuals from the worlds of technology and business have voiced concerns over some outlandish calculations. Jim Breyer, prominent investor and partner at Accel, a venture capital firm in California, commented early this year that he expects only 10 percent of current unicorns to survive and the remaining 90 percent either to fail or be revalued. Assuming his estimation is correct, only about 23 companies have accurate, or at least sustainable, valuations. In fact, skepticism is not uncommon. Bill Gates is wary of the future of unicorns as well, and warned of “overenthusiasm” in startups during a February interview with the Financial Times.

Regardless, some investors remain bullishly optimistic on unicorns. Scott Kupor, chief operating officer at venture capital firm Andreessen Horowitz, attempted to disabuse skeptics of the notion of a second tech bubble in a presentation this past year. He highlighted several key differences between 1999 and today, most notably the dramatic increase of Internet users (900 percent), the amount of funding (only 32 percent of the 1999 level) and the much lower median time to IPO (four years today versus 11 then), among other metrics. Evidently, he failed to convince many of his colleagues. A survey of 500 startups conducted by First Round Capital found that 73 percent of responders affirmed the existence of a technology bubble. The proportions of this bubble do not approach the frenzy of the late nineties, but there still remains an implicit understanding between startup owners and venture capital firms that valuations do not exactly equal value.

These mismatched valuations explain in part the scarcity of technology sector IPOs in 2015. Once public, markets will decide the true value of companies, so startups need to delay public offerings until fundamentals can support IPOs that reflect private valuations in order to protect investor value. Both Box, a cloud storage company, and Square, a payment service company, went public with offerings priced below their private valuations, providing a cautionary tale for executives and investors at other unicorns who have their eyes on the public market.

Like the valuations themselves, the disagreement over the existence of a second technology bubble can only be decided by the market itself in the years to come. Many of these unicorns have indeed reached incredible sizes with incredible speed. In seven years, Uber became the world’s largest taxi provider; it took AirBnB eight years to become the world’s largest hotel-provider. Perhaps it seems likely that the upper-echelon of the “decacorns” has substantial overlap with the ten percent mentioned by Jim Breyer. Yet, considering the 100 or so startups that may have wrangled for a billion-dollar valuation only for the title, many unicorns are simply overvalued, despite the “enthusiasm” attached to their future prospects. Silicon Valley and its bankrollers ought to remember that while enthusiasm is a critical asset for any startup, it is only as valuable as it is monetizable.

While many companies are fighting to sell their products in China, one market brings potential Chinese buyers to American soil. The American real estate market has welcomed potential Chinese investors, often taking advantage of the Chinese desire for market stability. Chinese buyers have made their own niche market in U.S. real estate. While Chinese investors have helped raise historically low housing prices in some areas, the consequences of this niche market could be detrimental to both the United States and China. For the Unites States, Chinese property investment will cause gentrification and form small housing bubbles. In China, the amount of wealth leaving the country will hurt long term growth. Therefore, the two countries need to put limitations on Chinese access to the U.S. real estate market.

The instability of Chinese markets has driven many to look overseas for opportunities. Due to China’s slowing economy, the government has taken heavy measures to devalue the Yuan (RMB), often without any prior warning. In August of 2015, the government devalued the RMB for three straight days. While China likely made these measures to increase exports to boost the economy, it shook public confidence in the domestic market. This lack of confidence also probably contributed to the stock market crash in 2015. A cyclical process started. As the stock market fell, so did investor confidence. In addition, according to Alex Frangos, state-owned enterprises were ordered to buy back stocks. As a result, $3.5 trillion could have been put back into the market only adding to investor worries over inflation.

According to a semi annual report from the Department of Treasury, between $520 and $530 billion dollars left China for America in the first eight months of 2015. From a financial standpoint, the Chinese government flooding the market with cash caused this large sum. The government injected more cash into the economy to help industries after the recession and to lower exchange rates with the hopes to increase exports. This monetary policy combined with the previous government policies easing restrictions on moving money have helped Chinese investors move liquid cash abroad.

The United States must eventually restrict these investments. As more wealthy Chinese start investing and eventually immigrating to American cities, housing prices and the general cost of living will rise. The increase in costs will displace U.S citizens who will not be able to afford the change in expenses.  Vancouver, the destination of many wealthy Chinese immigrants, already experience this type of gentrification. According to the Real Estate Board of Canada, housing prices in September 2015 were up almost 16 percent compared to the previous year.

As the cost of daily life and business go up, existing residents and business find it difficult to cope, causing discontent to increase among local populations. In Vancouver, the increased cost of living has led to ethnic tensions. Local governments never desire a heavily divided population.  Therefore, in 2014, the Canadian government stopped its investor visa program, the program used by many Chinese to enter the country. The Ministry of Finance stated that participants were not making positive financial contributions though this statement has been criticized on racial lines.

Like Canada, the U.S. should also limit Chinese investment to avoid small housing bubbles. According to Zillow, housing prices in Palo Alto, California were up around 16.4 percent in January 2016 compared to the previous year. Chinese immigrants have been flocking to Palo Alto for years. Some have probably immigrated due to President Xi Jinping’s anti-corruption reforms. According to the Wall Street Journal, Xi Jinping has taken more measures to prevent wealthy Chinese from leaving. Chinese banks have increased efforts to hamper individuals wishing to move large sums abroad. As restrictions increase on moving liquid cash, Chinese demand for U.S. properties will eventually decline, causing prices to fall. Should the Chinese government decide to suddenly crackdown more on international wealth transfers, communities such as Palo Alto may see a sudden drop in property values, as if at the end of a housing bubble. Given Xi Jinping’s strong attitude towards corruption and emigration, it would not be surprising if the Chinese government imposes more drastic, sudden limitations in the future.

While the United States cannot predict when or if the Chinese government will impose more restrictions, it can take its own steps to slowly curb Chinese investment. One significant measure is to tighten restrictions on the EB-5 investor visa. The EB-5 visa gives a green card to anyone and his or her family if they invest at least $1 million in a commercial enterprise that can create or support at least 10 full time jobs. Many Chinese use the money invested in American properties as a way to fulfill the monetary requirement while using projects on the property to fulfil the job requirement.

The United States should increase the amount required to obtain the visa. Many Chinese investors can put down $1 million with ease. The United States could also decrease the cap on visas given per year and only offer them to the highest bidders. This would decrease the amount of people entering the United States with this visa while also maximizing investment in comparison to just a general cap. The U.S government should implement reforms slowly though. If the United States hastily restricts Chinese immigration, housing prices in cities like Palo Alto would drop rapidly, American investor confidence in the over all real estate market could shrink.

China must also do more to reverse the exodus of wealthy Chinese. The more investors buy American property, the more Yuan they dump on the currency market. While China has attempted to devalue its currency to raise exports, the increasing efforts to depreciate the Yuan in comparison to the U.S. dollar will only encourage investors to buy American properties faster to avoid further losses. While Chinese banks have stepped up monitoring if people are following existing rules that limit exporting money to $50,000 per year, this measure will not be enough in the long run. The lack of Chinese confidence in their domestic market is the root of the problem. To improve confidence, the government needs to take a more hands off approach toward the markets. By letting markets take care of themselves, investors will not have to worry about sporadic government intervention that has been historically hard to predict. When government intervention is necessary, the Chinese government should give investors warnings about what actions it might take in the future. This will allow investors to prepare ahead of time and give more certainty to the market. However, to make these approaches work, there must be consistency between different Chinese administrations. One aspect of not only market instability but also government instability is the ease with which policy can change with leadership changes in Beijing. Increasing domestic market confidence will enable Chinese to invest at home, something that may help China’s slowing economy.

While Chinese investors have helped the real-estate markets in certain areas, the benefits will not last forever. China does not need more of its affluent citizens leaving the country and the United States does not need to see small housing bubbles across the country. Both countries need to rethink current policies before these issues become bigger. When markets suddenly boom after a slump, not many think about the long-term effects of what will happen. At least on the part of the United States, the US government must not let the current success of Chinese real estate investment get in the way of looking at long term consequences.

Is this tech boom another bubble? The similarities are easy to spot. Snapchat recently obtained a $19 billion private valuation, and as of right now the company has no established revenue streams. Examples like this can be perceived as clear signs that valuations are once again spiraling out of control in the tech industry. Moreover, according to data from the National Venture Capital Association and PricewaterhouseCoopers, venture capitalists pumped $48.3 billion into 4,356 deals last year (the most since 2000), while venture financings of more than $500 million hit a six-year high last year. Similarly, this April, the Nasdaq soared past the 5,048.62 points record set during the dotcom bubble for the first time.

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Big names in the VC industry, including Andreessen Horowitz cofounder Marc Andreessen and Sequoia Capital chairman Sir Michael Moritz have openly expressed their concerns about the bubble they believe is forming.  Another familiar name, Mavericks’ owner Mark Cuban, claims that this bubble is actually worse than the one that took place in 2000, mainly as a result of the transition of general public investments from public to private ventures, which he believes has eliminated the liquidity of those investments.

But perhaps things are not as bad as Mr. Cuban would like us to believe. Given the resemblance with the dotcom bubble, one has to wonder whether we actually learned the lesson or if we are about to fall into the same hole for the second time. While there is not a definite answer to this question, one thing is clear: things have changed. It has been 15 years since the dotcom bubble burst, and it has taken a long time for the venture capital industry to recover. The data show that both the industry and entrepreneurs have modified their approach by focusing on proven profitability and waiting longer before going public.

The public market is highly volatile and often irrational. For companies with a shaky business model and uncertain future revenue this might be beneficial in the short run, as unsubstantiated “hype” and excitement about potential growth might allow them to attract large amounts of equity.  However, the 2000 crash that resulted in a total loss of $5 trillion made it clear that this is also the perfect recipe for disaster, because as soon as doubts arise things can get very ugly very fast (the Nasdaq dropped 78% from March 2000 to October 2002). The disappointing aftermath of Facebook’s IPO (the stock fell 50% over the first six months) convinced entrepreneurs that it is not a good idea to take a company public before its business model and profitability have been proven to be sound, even for firms with high chances of profitability in the future.

As a consequence, startups are opting to stay private for significantly longer, with average years to IPO increasing from 3.1 to 7.4 and average revenue at the time of IPO going from $35 million to $102 million over the last 15 years (Suster). Patience has indeed proven to be beneficial for up-and-coming tech companies. Today, firms are more seasoned by the time they go public, and a remarkable result of this approach has been a significant increase in the share of profitable technology companies in the market (from barely over 50% in 2000 to 90% in 2014) (Richardson). Entrepreneurs have learned the hard way that Wall Street analyzes firms very differently from private valuation experts, with the former being sharply focused on short-term profits and revenue, while the latter places more emphasis on long-term growth and market potential. Growing startups would much rather avoid Wall Street’s impatience and the scrutiny associated with having publicly traded stock.

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This begs the question: what has changed in order to allow the race to success to change from a sprint to a marathon? The answer is the venture capital industry, which has  provided the money companies need to remain private. The consequence has been average late-stage funding skyrocketing to levels only seen during the dotcom era.  While some see this as clear sign of a bubble forming for its resemblance with the late 1990s trends, most experts would agree that late-stage funding is simply replacing IPOs for fundraising in companies over the extra time they stay private. This opportunity to capture extra value in the private markets has led some hedge funds and other major non-private-market investors to become late-stage VCs. Even J.P. Morgan has jumped on board by developing debt products for high-flying startups that do not think they are ready for IPOs.  The reason is that many investors lack the skills, the time or the experience to make great, patient, long-term, private-market investments and established late-stage companies (that in the past would have certainly gone public) are simply much safer bets. As a result, 66 percent of venture capital funds are now concentrated in late-stage investment.

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A perhaps more legitimate concern arises from the fact that private valuations have been soaring out of control, with the combined valuations of the Top 30 US startups ballooning from $78.8 billion in March 2014 to $181.2 billion a year later. Although in theory they are meant to be based on revenue and EBITDA multiples, valuation of startups are often not based on fundamentals. According to Randy Komisar, a partner at venture firm Kleiner Perkins Caufield & Byers: “these big numbers almost don’t matter… [they] are sort of made-up. For the most mature startups, investors agree to grant higher valuations, which help the companies with recruitment and building credibility, in exchange for guarantees that they’ll get their money back first if the company goes public or sells.” Public valuations on the other hand has shown very positive improvement since the dotcom days, with average price to earnings ratio in the market going from roughly 200 down to about 23.

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Automated Investment Advice        

New start-ups in the wealth management industry, such as Betterment, FutureAdvisor and Wealthfront, are changing the way that investing is being done. Rather than a do-it-yourself approach, or meeting with an investment advisor for face-to-face financial planning, automated investing platforms offer investors a low-cost way to invest capital, design a portfolio and rebalance the asset mix using software that is accessible from any device connected to the internet.

According to MyPrivateBanking Research, the automated investing market will experience significant growth from the current $14 billion in assets under management to $255 billion by 2019. Further, automated investment services are expanding globally. For example, Australian start-up, Stockspot, is getting first-mover advantage in the space, offering automated portfolios of Australian Securities Exchange exchange traded funds (ETFs).

How Automated Investment Platforms Work

Automated investment platforms use software to determine an investor’s level of risk tolerance and investment goals, and then uses algorithms to select and manage a personalized portfolio for the investor based on their individual needs. After an account is established, the automated software platform automatically rebalances the portfolio as needed.

Automated investment platforms use a step-by-step process in working with investors. For example, the system used by start-up FutureAdvisor helps investors determine which existing investments should be sold, what new investments should be purchased and why. The tool also allows investors to reject some of the recommendations, in which case FutureAdvisor will reevaluate the remaining investment recommendations.

There are three main advantages of using an automated investment platform. The first is that it automates the process of tax efficiency. For example, Betterment uses ETFs and municipal bonds, tax efficient buying and selling and tax smart dividend reinvesting as ways to embed tax efficiency into a portfolio. The more sophisticated automated platforms continuously harvest tax losses, that is, the selling of a security that has experienced a loss. By realizing, or “harvesting” a loss, investors are able to offset taxes on both gains and income. With automated software platforms, the sold security is automatically replaced by a similar one, maintaining the optimal asset allocation and expected returns.

The second advantage of automated investment platforms is that they automate the process of trading and transactions. This disciplined approach avoids market timing and avoids irrational and emotional decision making that is characteristic of human investors. Automating the buying and selling of investments can help reduce the irrational tendencies of investors who try to time the market.

The third advantage of an automated platform for investing is that the system automates portfolio management. Taking the investors risk tolerance into account, the automated platform puts the portfolio on auto-pilot and sends reminders when a human touch is needed.

Smart Beta

One of the approaches to automated platforms for investment management is to offer the client the best returns for the lowest risk. “Beta” is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

Smart beta strategies attempt to deliver a better risk and return trade-off than conventional market cap weighted indices by using alternative weighting schemes based on measures such as volatility or dividends. The use of “smart beta” by automated investment platforms is linked to a desire for portfolio risk management rather than only investment return. And automated investment platforms that follow a smart beta investment strategy seek to passively follow indices, while also taking into account alternative weighting schemes such as volatility. Generally, smart beta emphasizes weighting schemes based on fundamentals or market inefficiencies and can add greater diversification and improved returns over time.

In response to the success of start-ups in attracting assets under managements, Schwab, Vanguard and Fidelity have entered the field. For example, Schwab’s automated service for consumers uses “Intelligent Portfolios,” which are heavily weighted toward smart beta ETFs. Schwab’s “Intelligent Portfolios” combine cash allocations with a mix of market-cap and fundamental index ETFs.

Fees

Automated investment platforms using smart beta strategies may cost less than active management, since there is less day-to-day decision-making for the manager. However it will, at the very least, have higher trading costs than traditional passive management in an index fund (which minimizes those costs) and is a pricier option.

It is not uncommon for financial investment advisors to charge 1-2 percent annually or more via the loaded investment tools they may recommend. As history has shown, this is a steep fee to overcome in order to beat the performance of a passively managed index of the market. While there are different automated platforms and fee structures, most fees range from 0.40 percent to 0.60 percent of assets managed.  For example, Future Advisor charges 0.50 percent for their investment services and others have flat rates.

Do Automated Investment Services Have a Future?

The automated investing space is new and evolving. As yet, most entrants in the field are not profitable. Instead they are relying on significant venture capital funding. Still, the industry is growing with several companies already having over $1 billion assets under management. The ease in which new investors can open an account and have a portfolio selected, rebalanced and monitored for tax consequences is an attractive option for many investors just beginning the process of accumulating wealth through the stock market.

Nigeria House of Reps

Captivated by the high rates of return, investors from all over the world have now set their sights on The Federal Republic of Nigeria. As Africa’s most populous country, Nigeria also boasts the continent’s second largest oil reserves and has a very promising growth outlook. Poised to eclipse Africa’s largest economy by 2015, Nigeria is becoming a rather worthy recipient of foreign capital, receiving anywhere from $10-$12 billion per year. However, in order to take full advantage of what foreign investment has to offer, Nigeria must first improve its economic and political climate.

For Nigeria, meaningful, long-lasting economic growth and development is almost entirely contingent upon securing substantial amounts of foreign direct investment. FDI, as it is called, is crucial for the Nigerian economy, as it permits the transfer of technology and facilitates improvements in productivity. Ultimately, this can help alleviate Nigeria’s widespread poverty by increasing per capita income and elevating overall standards of living.

To be sure, Nigeria has a difficult road ahead should it want to achieve the economic growth and stability that it seeks. Nigeria’s development plan is simple in theory, yet rather difficult in practice given its poor track record. Due to its long history of economic mismanagement, corruption, incompetent leadership, political instability, and poor infrastructure, Nigeria has numerous obstacles that collectively deter foreign investment. Thus, at a fundamental level, Nigeria needs to create an environment that is conducive to foreign investment and healthy economic growth.

To do so, Nigeria must address each of these impediments to growth through extensive political and economic reform. First, there must be a dramatic and comprehensive restructuring of Nigeria’s economy. Currently, petroleum and petroleum products account for 95% of Nigeria’s exports. Such a heavy reliance on rich mineral reserves makes Nigeria highly vulnerable to volatile economic fluctuations. A fall in commodity prices can have a potentially devastating impact on the country’s terms of trade, and thus on the economic well-being of the nation.

Therefore, in order to achieve greater macroeconomic stability and diminish its vulnerability to commodity prices moving forward, Nigeria must reduce its dependence on oil and natural gas. It would be best for Nigeria to develop and promote its non-energy exports, which include manufacturing, knowledge-based services, and agriculture. At this point, manufacturing and services accounts for only one-third of Nigeria’s GDP, as compared to upwards of 80% for other, more diversified African nations. With regards to agriculture, despite only accounting for 41% of GDP, the sector employs 70% of Nigeria’s population. Overall low productivity caused by poorly managed harvests, and failed preservation techniques have forced Nigeria to import food to feed its growing population. If it improves its efficiency in non-energy sectors like agriculture, Nigeria can begin to diversify its economy by exporting cash crops like cocoa, citrus, cotton, and peanuts.

Through a greater diversification of the economy, Nigeria can also diversify the distribution of the FDI it receives. Up until now, Nigeria’s FDI inflows have been almost exclusively in the natural resources sector, specifically in the oil and natural gas industries. However, such a concentration in FDI limits technology transfer and inhibits job creation, due to the capital-intensive nature of the extraction process. Should Nigeria attract FDI in other sectors, including manufacturing, tourism, consumer products, and construction, these new FDI projects could generate greater employment and create more balanced economic growth.

Next, should Nigeria seek to develop these other segments of its economy, it must address its infrastructure problem. Infrastructure in Nigeria is largely publicly owned, and thus poorly maintained. Inadequate telecommunications, power generation and distribution networks, ports, roadways and railways all deter investors, as well as push up unit labor costs, offsetting any potential comparative advantage Nigeria has in that particular industry. For Nigeria’s manufacturing sector to be efficient, sound infrastructure is needed in order to keep transportation costs low.

A reduction in inefficiencies within Nigeria’s prized oil industry will play a pivotal role in helping Nigeria realize its potential. Despite producing an average of 2.38 million barrels per day in 2011 and holding the title of Africa’s largest crude oil exporter, Nigeria is nowhere near its productive potential. Ironically, Nigeria has to import refined fuel, due to its unproductive and inefficient oil refineries that operate at just 25% capacity. In fact, estimates suggest that Nigeria could produce approximately four million barrels per day within 10 years. To do so however, requires a more efficient use of resources and thoughtful economic management that have been largely absent up until now. Improper handling of oil discoveries in the past has led to inflation, which caused an increase in the price of manufacturing goods. By making these goods less competitive on the world markets, the oil industry has effectively crowded out other export industries, reinforcing Nigeria’s over-dependence on oil.

Recently, Nigeria has also undertaken initiatives to reduce its reliance on fossil fuels in favor of renewable energy sources. Wind, solar, and geothermal power have all been identified as potentially promising areas for growth and investment. Nigeria’s first ever wind farm, consisting of 37 wind turbines, is set to go operational in July of 2012. Financed by a Japanese agency, the project should contribute approximately 10 MW of electricity. Similarly, Nigeria has also begun an 800kW solar panel project, which is expected to supply electricity to one of the nation’s universities.

In addition to programs on the part of individual nations, African nations are now allying with the European Union to further coordinate their efforts. Designed to keep each nation focused on reaching their fullest output potential, the Africa-EU Renewable Energy Cooperation Program and the Africa-EU Energy Partnership (AEEP) have established renewable energy targets for 2020. Again, meeting these goals requires substantial amounts of investment capital, further stressing the need for political and economic reform.

An ongoing skills deficit also poses a problem for African nations like Nigeria. Nigeria is in desperate need of educational reform, to improve the value of human capital, raise productivity, and ultimately increase wages. Nigeria’s labor force is growing rapidly, but with lagging literacy rates and the lack of necessary skills, investors remain wary. To be fair, however, Nigeria, as well as other African countries, is already making progress in this regard, as productivity is growing at a rate of 3% per year in Africa, which outpaces that of America by .7%.

The nature of African markets, namely the restricted movement of capital and human resources across borders, has also posed concerns for foreign investors. Because of this, trade is quite low between African nations, since on average, 80% of African exports go to non-African countries. To mitigate this, Nigeria, as well as other African nations, has begun to liberalize its economy by reducing tariffs, import restrictions, and other trade barriers. In doing so, Nigeria promotes increased competition and boosts intra-African trade. Perhaps more importantly, though, these measures allow more nations to reap the mutual benefits from trade, and attracts greater foreign investment now that African markets are more integrated.

Continued, institutionalized economic reform programs like the National Economic Empowerment and Development Strategy (NEEDS) will be essential for Nigeria moving forward. NEEDS seeks to liberalize the economy, promote private enterprise through increased privatization and lowering corporate taxes, reduce corruption, diversify Nigerian exports, improve education, develop sound infrastructure, and ultimately reduce poverty and increase standards of living. NEEDS provides a tangible agenda that helps Nigeria stay focused on reaching its development goals.

Political reform is paramount, as political stability will be a key component in attracting foreign investment in the future. With a fragmented, multi-cultural society consisting of 250 ethnic groups, rival factions competing for power oftentimes create a politically unstable climate. Meanwhile, Radical Islamist groups like Boko Haram, which has killed hundreds in violent attacks in the past year, further discourages investors by increasing political instability and jeopardizing the return on investment.

What’s more, Nigeria is considered one of the top 40 most corrupt nations in the world, particularly in its dealings with the oil industry. The most recent fuel subsidy scandal involving Nigerian oil companies and Nigerian officials, which lasted three years and cost the country $6.8 billion, is representative of the larger, omnipresent problems of corruption, weak leadership, and economic mismanagement. Overall, through strengthening its democratic institutions, Nigeria can help tackle corruption, maintain political stability, and make good governance a priority.

It is important to recognize that increased foreign direct investment is not limited to Nigeria alone. Rather, other African nations— among them Tanzania, Ghana and Mozambique—have also experienced a recent increase in capital inflows. As a whole, the African continent is inviting more and more FDI than ever before.

FDI in Africa is predicted to reach $150 billion by 2015, compared to just $84 billion in 2010. The vastly under- realized productive potential of many of these African nations, coupled with an expected GDP growth rate of around 6% over the next couple of years, makes Africa a very attractive prospect for investment.

For example, in Mozambique, U.S. energy companies are seeking investment opportunity in its energy industry, given its recent discovery of substantial offshore reserves in the Rovuma oil field. In fact, in an effort to penetrate this lucrative East African market, American oil giant, Shell, has just offered $1.6 billion to buy African oil explorer Cove Energy, who has an 8.5% stake in the Rovuma field. Italy’s biggest oil company has a $50 billion natural gas project in place in the area as well. Tanzania is also actively encouraging foreign direct investment, with the establishment of a gas-fired power plant and power transmission lines currently in the works. Likewise, the recent discovery of two giant oil fields in Ghana has caused a surge in investment, particularly from the Chinese. Foreign investors from Brazil, Turkey, Malaysia and India are also eagerly investing in Africa, primarily in the natural resource sector, but also increasingly in the manufacturing and service sectors.

Curiously, despite these efforts and a rather promising growth outlook, Africa attracts just 5% of global FDI projects. This further emphasizes the need to address the primary factors impeding foreign investment and to improve upon the key drivers of economic growth.

As evidenced by its complexity and the dynamic nature of a globalized economy, economic prosperity is not a simple task. Instead, it is a gradual progress requiring good governance, coordination, cooperation, and patience. Although Nigeria has emerged as a capable candidate for foreign investment, and has made great strides in the right direction thus far, the process is by no means complete. Whether Nigeria—and the rest of Africa for that matter—can attract a greater share of global investment and achieve these lofty ambitions in the long run still remains to be seen.

In August 14, 2011, in an unusual move that made some of America’s richest and most powerful people wince, Berkshire Hathaway’s Chairman and CEO Warren Buffett called on Congress and the super-rich in America to support a reform in the tax code to treat capital gains as ordinary income.

This is by no means a novel idea, but the weight of Buffett’s opinion piece in the New York Times spurred immediate discussion. It is not only a question of how much impact such a policy move will have on resolving the budget crisis, but also who will rise to the challenge.

Capital gain or loss refers to the positive or negative returns realized on buying and selling assets, ranging from houses and cars to stocks and bonds. Capital gains are taxed depending on a taxpayer’s ordinary income tax bracket and the time period of gains.

For a long-term investor who generates his/her income from investments on the financial market, all of that earning is taxed under the current rate of 15%. This is the case for most hedge fund and private equity fund managers. They invest money garnered from various institutional investors and wealthy individuals, and make a living by keeping a portion of the returns, called carried interest, in addition to charging management fees.

It is exactly these alternative asset managers that the “Buffett Rule” targets. On September 12, the White House published a proposal on how to treat the carry. “Today, fund managers pay the capital gains rate of 15% but, under Obama’s proposal, it would be increased to an ordinary income rate that, for most fund managers, would be around 35%. This would apply to those managing funds in asset classes like private equity, hedge fund, venture capital, real estate, timber and oil and gas.” By taxing carried interest as ordinary income, the Congressional Budget Office projects an additional $21 billion in revenue over the next decade, $18 billion of which will go toward paying for the recently proposed American Jobs Act.

If such a reform has the potential of bridging the federal budget gap, why has there been such strong push back? The main argument from private equity managers is that taxing carry as income will disincentivize them to grow or acquire portfolio companies, therefore hurting job creation and innovation.

In response to Obama’s proposal, Steve Judge, president of the Private Equity Growth Capital Council said, “Proposals to raise taxes on carried interest have consistently been rejected for over four years because raising taxes on investments would only sideline employers and investors and create further uncertainty in an already struggling economy.”A 2010 study by the Council estimates that higher taxes on carry will decrease investments by $7 billion to $27 billion annually.

Political ideology also plays a major role in promoting the fight against changing the treatment of carried interest. “We do not have time to waste on political games and pushing big tax increases that will only make our economy weaker for all Americans,” said Sen. Patrick J. Toomey, a member of the deficit reduction special committee, in response to Obama’s proposal. Five republican presidential candidates have already declared their pledge to eliminate capital gains tax.

However, frontrunner Mitt Romney, cofounder of private equity firm Bain Capital, has not made reducing capital gains tax a part of his campaign platform. Even support from the Democrats has been mixed.  Timothy M. Kaine, former Democratic National Committee Chairman and former Virginia governor, has publicly opposed capital gains tax hikes.

Even if both sides can agree to heed the call of Buffett, the logistics of carrying out such a reform can be challenging. The IRS will first need to define middle-income family’s earnings and tax rate, which leads to complicated calculations for higher earners when taking itemized and state deductions into consideration. It will also require a more inclusive definition of income. “Writing a Buffett rule into law would require defining income and setting a minimum rate for it,” said Roberton Williams of the Tax Policy Center, “Every time you set up something like this, you’re opening the door for the tax lawyers to come in and get around the attempt to raise revenues.”

Carried interest taxation is, and likely will continue to be, a thorny issue. Warren Buffett’s public stance may have been a nice surprise to some Americans concerned about the deficit, but it has also renewed debate. For readers interested in alternative asset management or Dartmouth seniors heading to the industry after graduation, tax hikes on carried interest will not be the end of private equity or hedge fund investing. But in a fragile economy, it may be wise to keep in mind the worst case scenarios spelled out by fund managers.