Concept Advisory Services

• 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.

   

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Fish cakes

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