Concept Advisory Services

• Why Many Aren’t Securing Their Financial Future

  Posted: April 26, 2008, 3:47 pm by admin

  Most people know they should invest, just as most people know they should watch their diet and exercise. Nonetheless, millions of people — I estimate that 80 percent to 85 percent — don’t invest at all. What I mean by this is that these people aren’t active investors.

  An active investor is someone is someone who actually lives off their investments as opposed to wages from a job..

  It’s similar to the difference between amateur and professional golfers: Amateurs may be very good players, but can they live off their golf game? A professional can withstand the heat of competition and has the mental toughness and the physical skills to create a stream of income.

  At age 65, many amateur investors “turn pro” — whether they like it or not. And that’s a frightening thought.

  In this article, I take a humorous as well as a more serious look at why people don’t invest. This is a list of why people don’t invest — even though they know they should.

  Why People Don’t Invest: 12 Humorous Reasons

  1. They’re already paying into Social Security.(NSSF)
  2. Their budget includes k’sh 200 per week for lottery tickets, which is bound to pay off soon.
  3. They believe that inflation means their money will grow.
  4. Old people don’t eat much anyway.
  5. They sit at home waiting for the Publishers Clearing House van to pull up in their driveway and deliver their cheque.
  6. Their money is safely buried in the garden.
  7. Their rich Aunt Alice will die soon.
  8. Little Moses is sure to make it big in Nairobi.
  9. They’ll write a book and live off the royalties.
  10. They plan on marrying a young wife/husband when they’re 60 and depend on their financial support.

  Sometimes we need a break from the seriousness of why we invest and take a moment to laugh a little…or maybe cry. Unfortunately, even though funny, this list contains many truths.

  Apart from a light-hearted look at why people don’t invest, there are serious reasons for their inaction:

   
  1. They have an entitlement mentality.
  When the word entitlement is used, many people point an accusing finger to the poor and those on welfare. Yet, the sad truth is many people have an entitlement mentality. Starting with our President and working down, millions of people expect the government (or a business) to take care of them once their working days are over. This despite the shaky financial footing of Social Security and Medicare.

   I believe we should all learn to take care of ourselves. I agree and believe it’s about time our schools teach people to take care of themselves, rather than believe they’re entitled to government support.
  
  2. They lack vision.
  Millions of people cannot see past tomorrow. It was Tolstoy who said: “The most unexpected thing that happens to people is old age.” This year, the first Baby Boomers turn 60.

  As a young person, I hear many peers say, “I don’t have to worry. I’ll just keep working.” They don’t see that the day will come when their body cannot work anymore — if they’re lucky to live that long.

  The cost of long-term care exceeds what most people earn today. For example, a friend pays over 26,000 a month to keep his mom in a modest facility — that’s more than most families earn monthly. What’s going to happen when 5 million Baby Boomers start needing long-term care?

  Today, I also hear young people blithely saying, “I’m still young.” Whenever I have the opportunity, I remind young people that the Baby Boom problem is really theirs to finance.

  
  3. Our school system doesn’t teach us much about money.
  “Go to school to get a job” is common advice. But that idea echoes the entitlement mentality, the idea that once you have a job, the company and the government will take care of you. It also reflects a lack of long-range vision. Today, we need to be educated about money beyond just “getting a job.” We need to be educated for life after a job, after our working days are over.

  The entitlement mentality and myopic vision stem from one place — our schools and the lack of financial education in our educational system. It’s time for our educational system to enter the 21st century and prepare people for the real world.

   

• On Stock’s Speculation

  Posted: April 18, 2008, 8:39 pm by Busolo

  The synonyms for speculation include rumors, gossip, assumption, guesswork, and hearsay. According to Investopia, an online tool for investors, financial speculation is no different from the definitions above and involves buying, holding, and selling of stocks, currencies or any financial instrument to profit from its fluctuations in price as opposed to buying it for use or for income via methods such as dividends or interest.

   

  A degree of speculation exists in a wide range of financial decisions, from the purchase of a car to a bet on a horse.

   

  A speculative stock is one that has the probability of increasing in value over a short period, thus offering investors above average returns. The lure of these returns entices many investors to buy. Those who believe a share will appreciate without performing a detailed analysis often purchase speculative stocks.

   

  At the Nairobi Stock Exchange, stocks that qualify as speculative include Mumias, KenGen, Eveready, Kenya-Re and HFCK in the financial category. These stocks trade in high volumes, they have a high PE, and a small movement can result into huge gain or loss.

   

  Most people lose money in speculation while those who make money tend to become professionals. Speculation is not a one off event and majority of speculators will admit to having done it over a considerable period. By definition, most long-term investors even those who buy and hold for decades may be classified as speculators except only the rare few who are not primarily motivated by eventually selling at a good profit.

   

  Speculators risk their own capital in the hope of making a big profit and they add liquidity to the market making it easier for others to offset risk. Let me explain. When they is a rumor of a stock appreciating and supply is low, speculators come in hoping to profit from the scarcity by buying. Their purchase fuels demand on the share and the share price rises. At this point, a keen investor who had bought an overpriced stock has an opportunity to get out.  On the other hand, when the price is higher than the speculator thinks the facts warrant, they sell. This reduces prices. As it happened in January when majority of retail investors were opting out, foreigners and institutional investors cashed in on the low priced stocks.

   

  The quality requirements to buy speculative stocks due to the high risks is to have a strong stomach, you have to be capable of sleeping well at night under any circumstances. These stocks may provide you with great capital earnings or losses.

• Are You Gambling When Investing In Stocks?

  Posted: April 10, 2008, 7:30 pm by CRB

  I have a lot of fun following individual stocks. I keep tabs on a small handful of companies that I have a personal interest in - Centum, Kenya Re, KenGen, and Barclays Kenya, namely. I watch for news articles on the company, read their annual and quarterly reports, and stay up to date on pretty much everything about the organizations.

  For a short while, I owned individual shares in Housing Finance and Mumia’s Sugar in mid-2007. I bought into HFCK in late July, purchasing about 4,000 shares when the stock was at k’sh 38. Over the following three weeks, I watched HFCK drop like a stone to below k’sh 25, then I sat there through late August and early September as it rose back up to k’sh 40. I sold immediately. Over the same rough period, I bought 500 shares of Mumias at k’sh 32, watched them sink and struggle to rebound, and sold the shares in late September at k’sh 29.

  In the end, I didn’t lose too much money. What I did lose is a lot of sleep. The second I owned those stocks, I became obsessive over those two companies. I read every single morsel of information that came out about them, read reports, studied numbers, sweated, didn’t sleep at night, and a few times I even queued up panic sales of these stocks.

  The second I finally sold all of them, I felt much better, and I walked away with a bitter taste in my mouth. But is that the right lesson to take away from the experience? Let’s dig into the idea a bit.

  Most forms of gambling that aren’t merely chance, such as blackjack and poker, are games of partial information. You know some of the information out there - the cards you hold, perhaps some of the cards the dealer holds, any revealed cards, and the “tells” that the other players have shown you. At the same time, key pieces of information are hidden - what the others are actually holding.

  The same statement is true of stock investing, except the story is a bit different. Most of the information you’d really need to know - in fact, virtually all of it - is right out there for you to see. The only problem is that it’s like trying to find a water droplet in Lake Victoria - there’s so much information out there that processing it all is impossible.

  As a result, stock investors often choose specific pieces to focus on. Perhaps they look at the P/E ratio for a company, or maybe they look at the backgrounds of the company leaders. I’ve read tons of books about different strategies, but most of them boil down to isolating a few key pieces of information about companies and using them as a judge about when to buy and when to sell.

  The problem is that no individual metric is perfect. One can’t ever boil down the complexity of Mumias entire business into just one factor. What would happen to Equity stock if tomorrow morning James Mwangi dropped dead of a massive heart attack? Do you have any idea? Obviously, it would go down, but how far would it go down? Would Equity weather that storm? Those are both huge unknowns, but investing in Equity stock means you’re making some sort of prediction on those questions. You’re using one view of the information to make a judgement about a whole company.

  Some people respond to this glut of information and the inherent risks quite well. They focus in on specific things and just blot out everything else. They do the homework they need to do and walk away from it. Are these people gamblers?

  What about others, like myself? When I invest, I am almost driven crazy by the desire for more information. I know that there is more to know about where my money is sitting, and I need to know it. Am I an information addict?

  Personally, the risk itself doesn’t bother me so much - I am merely overwhelmed by the actual level of information in that information game. But what about a person who knows why he’s investing, but is ready to throw up after a 0.5% drop? I have a close friend like that - he basically can’t invest in anything that isn’t fully guaranteed. Is that person far too conservative?

  It all comes down to personal makeup and psychology. Some people are predisposed to play this information-rich game; others simply aren’t. I put myself into the “ average predisposed” category - I invest when I have money that is truly “play” money, but not if anything of any importance relied on that money. It would move from being a dalliance to being an obsessive information hunt - and that’s the result of my psychological makeup, not the game itself.

  Individual stock investing is something like playing blackjack at a casino where, on every hand, the dealer is wagering just a little tiny bit more than you, but there are thousands of people around you shouting out suggestions. If you can concentrate enough and take the time to sift through the information overload correctly, you can potentially go on a very nice winning streak - and the odds are slightly in your favor. At the same time, though, as with any game where you don’t have all the information, you can very easily go on a losing streak.

  My solution to all of this - and the solution that leaves me sleeping well at night - is to buy some units from the fund mangers. That’s kind of like going to that casino and playing 5,000 hands at once with earmuffs on. Because of the huge number of hands, the luck of any individual hand is negated and eventually you end up with a small overall win without the stress, time, and focus needed to win at an individual hand.

  I think investing in individual stocks is a fine diversion and a potential way to earn a lot, but far from a guarantee and the work needed to get those earnings is tremendous. For the casual investor who hasn’t invested the time to really learn the game and the investment and learned how to fight through the information noise, individual stock investing might as well be gambling.

• Time Value For Money

  Posted: April 9, 2008, 7:33 pm by CRB

  The basic idea of time value of money is that a shilling today is worth more than a shilling tomorrow. This can be shown in many ways, many people find it easier to understand if they think in terms of something they already know: food. For example having the money today allows you to buy some food immediately. Alternatively, you may be willing to forgo current consumption and wait until later to purchase your food. Thus you could lend your “food money” to another with the promise of being paid back at some future time. Since you are passing up food today you would demand a return sufficient to allow you to buy at least as much food in the future that you are giving up now.

  As we do not know the future this type of deal involves risks. For example, the borrower may decide not to pay you back. This is called default risk. Or the borrower may pay you back but due to rising prices, you can no longer purchase the same amount of food as you had expected to be able to buy. Because of these risks (you as a lender) would require a higher interest rate to compensate for accepting the risks. However if you ask for too high of interest rates you will not find any takers for your loan.

  Stock trading is a bit different in the sense that you only make a gain when a stock appreciates or when a company announces a dividend. Majority of us venture into stocks not because of the dividends but for capital gains. And here in lies the trick. When do you decide that it is time to offload? Many of us rely on gut feeling. You watch a particular stock and at one time you feel that it has reached its peak you offload. This is what financial analysts refer to as timing the market. A risky venture if you ask me. If you engage in this type of trading, that is why you sometimes feel like you exited too soon, and other times you curse yourself for holding a stock past some price.

  Personally, I prefer setting a price target. This way, I reduce the agony of deciding when to offload or buy. Some of you might consider this as speculative trading but I see it as smart trading. Assume you buy Centum investments today at a price of k’sh 25 and you put a price of k’sh 32 as the price to dispose. Come January 2009 the price shoots to k’sh 33 and you dispose. Owing to the cyclical nature of the market, the price is bound to come down to levels of k’sh 30 or to a high of k’sh 35. You then have a chance to buy the same stock at a discounted price of k’sh 30. However, it is also a gamble considering that the price may take some time to come down. This is equivalent to long term trading with the advantage of acquiring more shares for the same stock and with your initial capital.

  How about where to invest, in order that your money works for you by giving you a higher return over and above the rate of inflation. I always wonder why someone would want to have all his wealth in a savings account. Our banks are notorious for low interest rates on fixed deposits and savings account. Nowadays they have improved from a low of 3% to 6% for fixed deposits. With Stanbic and Standard chartered bank doing a 6% rate. Do not even think of a savings account as the rates are horribly low. I am talking of less than 1.5%. With the Unit trust products, banks are feeling the heat as customers continue to withdrawal their savings and putting it in the hands of the fund managers.

   For those of you who have doubts on their ability to make it at the NSE, the fund managers will invest the monies on your behalf. Moreover, the minimum amount to place with the managers has come down with Suntra Investment Bank having a low of k’sh 100,000.  They are many applications pending for registration as fund managers and this would be a welcome move, as charges will come down. The 7% annual charge is a hindrance to many as this eats into their investment. Last year NSE posted a negative return of 2% and this reflected in the unit trusts performance. For those who had invested in the equity fund they was the dip in the market to factor and the charges too. This resulted in even lower returns.

  They is also forex trading for those willing to risk a little more. I have always considered forex trading as equivalent to gambling. Tried it once and burnt my fingers. I thank God it was those dummy accounts. Rather than castigate forex trading I have sought an expert and the lessons are interesting. Given time, this might just turn out to be the next big thing.

  The opportunity to make some money is limitless if only we are willing to learn and pay the price.

   

• Keep Your Goals in Mind When All Is Not Well

  Posted: April 8, 2008, 9:26 pm by CRB

  As we have closed out the first quarter of 2008, those who have investments should be receiving their quarterly statements in the coming days. The first quarter of the year was not a very good one in terms of performance, and if you have investments in the stock market or equity fund, you’re probably going to see some negative numbers.

  Nobody enjoys losing money, but even if your statement shows that you did during the first three months of the year, don’t panic. You should certainly examine your investments and see how they fared, but make sure you’re doing it in context of your investment objectives. For example, if you’re looking at a unit trust account and you have 2 years until liquidation, the last thing you want to do is make drastic changes based on a couple months of poor performance.

  When you make significant changes to your investments based on what has happened over a relatively short period of time, you’re trying to time the market. It has been proven that it is extremely difficult to consistently make good investment decisions by getting in and out of investments by reacting to current events.

  Also keep in mind that by making a change now, you’re doing so after the damage has been done. In a perfect world, you would make these changes in anticipation of a current trend. Selling an investment now based on what happened in January doesn’t make much sense, does it? The markets could go down further, they could trade sideways, or they could go up in the next quarter. It is anyone’s guess.

  You also want to keep things in perspective when it comes to performance. Remember, you’re quarterly statement just shows a small snapshot of time. If you look back over the past three or four years, you’ll likely see that one bad quarter isn’t as bad as it first seems. There will always be ups and downs, and it is unrealistic to expect to see uninterrupted positive gains. Will your investments go back up? Certainly. It might not happen overnight or even after a few months, but the cycle will reverse just like it has done many times in the past.

• An Interesting Encounter

  Posted: April 3, 2008, 9:18 pm by CRB

  On Monday evening, I shared a lift in downtown Nairobi with a man who gave me his card. Apparently, he works as a success lecturer at Success University. If you are wondering whether the university is real, just visit Norwich Union 5th floor. I know it because the man invited me for a session at his office/university having said it ‘would change my life’ forever. My schedule on Tuesday was a busy one and so we planned for 6.30pm yesterday.

  I kept my promise and at 6.30 Pm, I was promptly at the door. I was ushered into a modest furnished office where the host warmly welcomed me for having made it. In one of the room, some sort of lecture was going on. It is just some two rooms and it does not require you to be extra keen to hear what is going on in the other room. My host requested that I wait for our presentation as they were just finalizing with an earlier group. I was not alone in the waiting area and immediately struck a conversation with some fellows invited.

  The surprising thing was that it was a mixed crowd in terms of age and from our conversation majority were professionals or business people. I had expected to find the usual desperate Nairobi crowd who are always on the look out for an interesting event to attend.

  Eventually the group before us finalized and we got in.

  Success University has its origin in the United States and has a presence in over 70 countries. Kenya is just among the many countries. The concept behind it is simple or so I got. The owners or lecturers have teemed up with notable personal development experts or gurus and have compiled their material into one package. The gurus include Zig Ziglar, Antony Robbins among many. For registration you pay the equivalent of 170$ (k’sh 11,000) and you can enroll for monthly classes at a monthly charge of 40$ (k’sh 2,600) which is optional. With the registration fee, you get a couple of CD’s on topics of interest including personal finance, marketing, sales, love, relationship, and entrepreneurship.

  As a learner you can also make some money. For every student you introduce you get 60% commission on the joining fee. The more people you introduce the higher you move in rank and the higher you earn in commission. Looking around the room I could figure out that many were not there to make some money but to learn on how they can improve on some areas of their life. Personal development is a multi million-dollar industry and I was not surprised that many had attended. Look around you and you will not miss an advert promising you how you can improve your finances, love life or career if only you followed some steps. The best sellers in our bookshops are not the fictional work or educational material but books dealing with personal development.

  I can smell a prymind scheme a mile away and this was not. They call it multi level marketing and even though the ones I know deal with real products this one is service based. The only similarity is the aspect of recruiting where you have to enroll new student for you to make an income. And if you ask me this is normal sales task. Because there is a real value in form of the inspirational books and motivational talk, it is not a hot promise.

  Its not that I have joined, what I am giving is my observation and understanding. The lecturers did give a presentation on personal success that I found very informative. They touched on personal finance, motivation,  and success in inter personal relationships among other topics. Considering we are not taught how to lead balanced lives through formal schooling, this is one meaningful talk I have attended this year. I would encourage you to attend. After all knowledge is power.

• Progress on Safaricom IPO

  Posted: April 2, 2008, 6:45 pm by CRB

  The enthusiasm shown by investors on the Safaricom IPO is impressive. Even with the negative publicity, scores of investors are lining up to apply for a share of the most profitable company in the region. The bug has caught even the cautious Ugandans and I understand there is a lot of interest from that side. Our politicians finally gave up though I did not take them seriously in the first place: I mean, if they were not for the sale the simplest thing would have been to file for an injunction and halt the process. Talk of playing with people’s emotion.

  But I did agree with them on the issue of disclosure. Our capital markets will not reach he projected highs if deals are within ‘an old boy’s network’ as it is the case with Safaricom shareholding where Mobitelea acquired a 10% stake without any form of consideration.

  I also understand that Kenyans have taken up well the issue of online application. I have checked it and its simple enough for an average investor. Majority of investors are still wary of the process and would rather stick to the old and tested way of application. Moreover, I can understand their concern since online application removes that personal interaction between an investor and the broker.

  There is no doubt that the share offer is going to be oversubscribed considering banks and employers are financing up to even a 100%. This is advantageous to those who will dig into their savings as they can dispose even in day one in the secondary market. In financing, the shares allocated will act as security. As we wait for refunds they is a likely hood of the share appreciating; lets admit it, even at k’sh 7 it is still a fair deal. My only concern is this time around we may not see the 300% or even 200% appreciation on the first day of trading as we have been accustomed to. There is a large amount of shares in the hands of retail investors whose aim is to make a quick buck. A slight appreciation will result in a high supply thus depressing the market.

  I had expected other counters at the NSE to be performing poorly but not at the current rate. The prices have corrected in regard to the offer but only with a small margin. Actually, since the opening of the offer the NSE index has been climbing. With the realization that it will not be a full allocation savvy investors are looking into the other counters. I am seeing this change in the next two months. Upon listing and assume the price does not rise in a big way there will be a lot of interest as both retail and corporate investors take their position with the future firmly in mind. Other counters will be ignored albeit temporary. Their prices may not go down but will not go up either as investors adopt a wait and see attitude.

  There are a couple of things to learn from this IPO. One is on the success of online application. Will it be as messy as the manual? Can it serve us with the next offer? I am also interested with how the foreign investors are seeing the offer. Their price will be through the infamous book building process. And considering how the year began for Kenyans, will the foreigners find the offer attractive. This includes our neighbors who for all intent and purposes are foreigners. As William Ruto pointed out, this company has been built from scratch with the sweat of Kenyans and Kenyans should derive maximum benefit before we can invite a third party.

Blah blah blah

Fish cakes

Alas a fish cake.

Yet more fish cakes

Guess what ... yeah ... fish cakes.

The end of the fish cakes