Raising a Money-Savvy Child

Long before most children can add or subtract, they become aware of the concept of money. Any 4-year old knows where their parents get money - the ATM of course!

I got a friend to help me quiz some children between 5 & 6 years in his Sunday School class. 30% said they didn't know where money came from. The remaining 70% gave the following answers to the question "where does money come from?"

• Mum & Dad
• Kibaki
• From God
• The bank
  
• From teachers
• From the government
• The church

The life-long benefits of teaching children good money habits make it well worth the effort. Children who are not taught these lessons pay the consequences for a life-time. I find it rather interesting how some smart bankers, doctors and accountants who earned excellent grades in school still struggle financially all of their lives! Some parents don't teach children about money because they think they shouldn't talk about money with children, don't have time, or think they don't have enough money. Parents should take time to teach children about money regardless of income and should start when children are young.

Parenting is not an easy job. A lot of challenges faced within parenting such as this subject are not readily available in a parenting manual. I looked all over the place for some book I could recommend on the subject but to no avail. Over 70% of the people I spoke to about this subject said that they had been taught nothing about money and investing by their parents. The challenge then, is to teach our kids about money while having no role models on which to base these teachings.

How can you assure that your children will know the value of a shilling, understand the importance of saving, and make financial decisions once they grown up to be adults? I was introduced to a well-read, intelligent man, Pastor Muriithi Wanjau from Mavuno Church who was kind enough to share his insights, which I thought make up the perfect manual for raising financially savvy kids.

So where should parents begin? The best place to start would be for both parents to discuss their values and determine how they will create an open environment for their children to discuss money. Issues such as how children should receive money, family values and attitudes about money, how to structure learning experiences for children, how to handle effects of advertising and peer pressure must be mapped out so that when they arise, both parents can deal with them in a consistent manner.

In Sharon M. Danes and Tammy Dunrud's publication, "Teaching Children Money Habits for Life", they maintain that teaching your children about money is more than preparing them for employment or teaching them to save some of the money they earn. It includes helping them understand the positive and negative meanings of money. For example, children need to learn that while it's nice to show someone love by buying a gift, it is just as important to show love through actions and words.

Children and parents should talk about their feelings, values, attitudes and beliefs about money. This helps children understand that conflict about money occurs and needs to be discussed in the family and that compromise is often necessary.

According to Pastor Muriithi, once your child begins to ask for things, usually candy or toys from a shop, he or she is ready to be taught about the value of the shilling. Most children would be about three years by this time. Take them shopping and let the child pay for one item. For children who are not yet going to school, separate coins into piles by size and discuss their value.

Children learn mainly through indirect teaching and by observation and example; a good idea that Pastor Muriithi shared with me was his way of teaching his child. He has 3 "piggy banks" or tins labeled "GOD" "ME" "SAVINGS" in which his six year old daughter puts in her coins once she's earned them doing some odd jobs. He finds ways of giving her little tasks around the house that she can do to earn some money, so that when she wants something she knows how much work she needs to do to be able to have enough to buy it.

How should children receive money? One of the contentious issues regarding money and kids is allowance. Some children may receive money by allowances, by parents doing it out upon request, as gifts on special occasions, or by earning it. Each family appears to have a unique financial solution, in deciding whether or not to use an allowance.

I however concur with Pastor Muriithi who feels that an allowance given on request or for free is not a good idea. Children need to learn that they will never earn something for nothing in life. They need to learn early how to find ways of making money and multiplying it. When a child is given money, they do not develop creativity as far as ways of making more. He gave me an example of his friends daughters who are both teenagers (16 and 18) and through odd jobs and investing, have both saved over KShs 150,000! How may young Kenyans in their late twenties have 150,000 just sitting in the bank?

I remember pressuring my parents, when I was younger, to give me an allowance because "all" my friends were receiving an allowance. My father however never budged! I know understand why.

"The most critical age of a child's growth and development is from 1 to 7 years. The next most critical years are up to 12 years. After 12 years of age, it is difficult to instill values in children" Pastor Muriithi

By the time a child can talk and begins to ask for things, parents can begin to work on concepts such as earning, spending and saving. Earning refers to how children receive money. Spending refers to the way children decide to use their money. Saving refers to money that the children set aside for some future use.

By getting your children to carry out some odd jobs and earning some money for it, you give them a sense of freedom and recognition. Earning also teaches financial independence, the value of work, work standards and habits, how to evaluate job alternatives and the relationship of money, time, skills and energy.

Spending teaches the difference and balance between wants and needs. It gives opportunities for comparing alternatives, enables children to make decisions and take responsibility for them as well as keeping records. Parents should let their children make mistakes and learn from the consequences.

Parents should make sure their children know they've made mistakes too. Let the child know that you can't afford to buy everything you want either. This could be brought out while window shopping together. It's a good idea to also explain the bigger picture too.

For instance, going to the movies doesn't just involve the price of a movie ticket, but fuel for the car, popcorn, time and energy. This will help them be more aware when making financial decisions. Communicate. It's important for parents to talk to their children about money. Include children in family financial discussions appropriate for their age. This helps them feel valued and tells them that money is not a taboo subject.

Saving shows a child how to get what they need. It teaches planning and the concept of delayed gratification. It also teaches the interrelationship of spending and earning. It also teaches the different purposes of planned and regular saving. For instance, a six year old would have short term savings for a specific want or need put into their "ME" tin/piggy bank and regular savings, which are long term put into their "SAVINGS" tin/piggy bank. The difference between the two should be explained to the child.

Help the child set up short-term savings goals and let them know how long it will take to save a particular amount. Keep praising and encouraging your children and motivate their saving by annually matching the amount the child saves. When your child is about 7 or 8 you could open a savings account at a financial institution that accommodates children. Go with them to open the account and explain interest and how the institution works.

As the child grows older, they need to be able to pay for more and more of their material needs such pocket money for school trips, and so on. You should also teach them the concepts of borrowing and sharing. Borrowing means that the money can be obtained for use in the present but must be paid back in the future with additional cost. Sharing means both the idea of sharing what we have with the less fortunate.

As you teach your children about money, remember to continually encourage and praise them rather than criticize and rebuke. Allow them to learn by making mistakes and through successes. One important thing you must remember is to be consistent. Consistency is the key to giving kids a healthy attitude about money. So however you formulate your plan, stick with it. And remember the pay-offs; not only will your kids know their way around a bank statement, one day, they'll be able to support you in your old age :)

Baring Out The Logic Of Equity’s Growth

by: Rina Karina, 2 Apr 08
Equity Bank's total income compounded annual growth rate of 193% per annum over the last five years has astounded many. From gutter press articles, S.K. Patels and phantom employees raising alarms of an impending collapse, to parliamentarians putting forward accusations that have had no basis.

In July this year, the Central Bank of Kenya (CBK) Governor, Prof Njuguna Ndung'u advised the public that an audit of Equity Bank had been carried out and CBK was satisfied with the financial strength and stability of Equity Bank and all other banks currently operating in the market. Yet many continue to allege various improprieties against Equity.

Without a doubt Equity Bank has continued to puzzle many, and it is for this reason that we thought fit to bring to light some facts about this Bank that is making waves not only in Kenya and this continent but in the corridors of the United Nations and the rest of the world.

The bank's business model is simple: to bank the un-banked population. The original founders of Equity had the desire to create a financial services provider that would focus on low income clients and this desire was driven by the realisation that the low and medium income earners had no access to formal banking. Equity was registered under the Building Societies Act and started off as a specialist provider of mortgage financing to its members.

This however was difficult as the Company was limited by undercapitalisation and in 1993 the Central Bank of Kenya declared Equity technically insolvent. The bank's management then put together business model that would help turnaround the company - the shift from mortgage finance to microfinance and a focus on the un-banked population.

The fact of the matter is that Equity Bank's strength lies in its strategy of offering banking services and lending to a previously untapped segment of the market. The bank has high operating margins, efficiency ratio improving from 72% in 2005 through 67% in December 2006 to 60% in June 2007. This has been on the back of efficient growth leveraging the unutilized capacity of a modern and scalable IT infrastructure, ability to maintain above sector average net interest margins and minimal bad debt incidents.

Equity Bank enjoys some of the lowest cost of funds in the sector, at less than 0.78%, while the sector average is roughly about 3%. This has been driven largely by the banks aggressive non-tariff deposit mobilisation inducing nil minimum balances, absolutely no ledge fees even for cheque accounts and lowest minimum interest attracting balance of KShs 10,000. Along with this, is the presence in un-banked sections of the country where the bank can get away without paying for deposits. Equity's savings mobilisation has been its greatest success.

In order to increase outreach into remote and densely populated rural areas, Equity set up mobile banking units fitted with modern IT systems, powered by solar panels. The mobile banking units are customized pick-up trucks which carry lap-tops with information being downloaded and uploaded at the beginning and end of each day.

Equity now boasts 1.4million customers and majority of these clients are small-hold farmers, low end salaried workers and small & medium sized businesses. The bank continues to grow, opening an average of 4,000 bank accounts a day! The bank has grown its lending book at a blistering pace from only KShs 5.5 billion in December 2005 to KShs 14.6 billion by June 2007. This has been achieved through check out systems with employers, lending to SMEs and to entrepreneurial individuals whose own discipline and desire to succeed shields them from the stigma of defaulting.

Equity has redefined its credit policy, with a clear focus on enhancing internal controls to cultivate and maintain a well balanced and high quality loan portfolio. Two years ago, Equity had a problem with lack of focus on a particular niche market in the credit methodology. The Bank tried to cover many markets at the same time and found it difficult to define its typical client and staff tended to use the same commercial banking approach for all types of loans.

This has now improved. The bank has identified the following sectors: Microfinance, Corporate, Consumer, Agriculture and SME. Each business segment is headed by a sector head that is responsible for the performance of their existing sectors. However, the bank may have out grown itself and needs to recapitalise in order to be inline with the CBK capital adequacy guidelines.

The bank also requires the funds for its expansion program as well as to increase lending. We therefore envisage that the company will have to undergo an equity recapitalisation, by either carrying out a rights issue or perhaps selling a certain percentage of the bank's shares to a strategic investor.

The proposed purchase of 20% in Housing Finance (HF), Kenya's leading mortgage finance company spawns tremendous revenue opportunities, cost synergies and scale advantages. The revenue opportunities accruing to Equity Bank are thus: the opportunity to push HF's mortgage products to a section of its clientele and benefit from the resulting explosive growth in HF's business (targets are to sell mortgages to a very conservative 5% of Equity's 1.4 million customers or 70,000 accounts).

Quite an unimaginable feat against only 4,500 mortgage accounts in 30 years of HF's existence! The other revenue opportunity is to be able to lend medium term deposits to HF at a much higher interest margin than attainable from treasuries or deposits with other institutions. The resulting interest spread would accrue to Equity as marginal income on existing assets. Cost synergies that will result include shared services, debt recovery, staff and marketing efforts.

The nine key shareholders of Equity Bank, including Mr. James Njuguna Mwangi who owns 7.32% of the bank were locked in when the banks shares were listed in August 2006 and will not be able to trade their shares until August 2008.

All in all Equity is without a doubt the leader among its peer group. It offers a diverse variety of banking services, has management expertise, experience in the microfinance sector and well placed infrastructure and IT platform. The bank's short-to-medium term plans include the continued expansion of its domestic franchise through investment in additional branches and ATMs, continued innovation of services channels and the possible acquisition of other banks (considering an industry consolidation). Going forward, key challenges for the bank include: maintaining an adequate level of asset quality, particularly in light of the exponential growth in risk assets and the maintenance of its capital position.

Personal Finance

Personal Finance
by: Rina Karina, 2 Apr 08
Sometime this year after I made a presentation on the stock market to some 200 or so men, I got a question from one of them asking how I could talk about investing money when a lot of Kenyan's lived from hand to mouth. He said that the average Kenyan's concern, was not stocks, bonds, etc but where their next meal would come from. His comment saddened me a great deal as it made me realise that a lot of Kenyans don't think about saving as a necessity but rather an activity carried out by the wealthy.

David Ithanya, in his book, The Winners & Losers of Capitalism; and why Africa is not winning yet, states "Africa's problem lies more in its collective attitude, collective outlook and collective mindset. It is the expectations that Africa has of itself, that are terribly low. It is Africa's collective sense of self worth and self belief, which unfortunately, sometimes seems to reside only in rhetoric."

It is important to believe that we as a nation can solve our persistent and pressing problems without the assistance of foreigners. We as a nation and as a continent must find our OWN solutions to our pressing problems. It is my firm belief that when we begin to make a difference in our thinking and personal finance, we will affect the economy of the nation.

Kanjii is a great friend of mine whose view on personal finance is refreshing in its simplicity and practicality. The reality is that successful investing is not difficult at all. It's just intimidating. You don't have to understand all the ups and downs of the Stock Exchanges in the world, the interest-rate decisions by the Central Bank, economic indicators and so forth.

All these things have significant meaning but you don't have to follow them all to invest well. All you really need is to have an understanding of several facts and be confident in yourself as you begin. Ever heard of the three baskets of success? Kanjii introduced them to me and I think they're a brilliant way to group your financial goals.
The first basket of success is the Security Basket. In this basket are finances sufficient to support your current expenses: food, rent, clothing, entertainment, fuel, and so on. You also need to keep at least 3 to 6 months of your income as "damage management" or "just in case" funds. This money needs to be in the bank or in marketable securities such as the Money Market fund or Treasury Bills that are easily and quickly accessible.

As you fill this basket, you would need to consider what your current financial situation is. Are you in debt? Do you have a car loan or a mortgage? Are you planning a wedding? Going back to school? Planning to have children? And so on... You should at least have the basic life insurance that covers you and your family in case of terminal disease, death and accident. This is very important as even though you might lose all your money in an investment, if you need medical attention, it will be taken care of. The size of your security basket will depend on your current financial needs.

The second basket of success is the Investment Basket. Making deposits into this basket should be done once the security basket is full. The investment basket will have the kinds of investments that should provide you with the money that you will need to meet the needs that you expect to have in the future.

Most people have more than one investment objective: a secure retirement is almost everyone's long term goal, more immediately pressing goals are: a down payment on a house, or a child's college education. In this basket you would have both short term and long term assets: stocks (or shares), bonds, bills, real estate, unit trusts, and so on...

You would need to calculate how much you will need to set aside in order to make these investments. The single most important thing you will need to do to ensure that this basket is filled is to live below your means! If you want to be able to invest and accumulate wealth to help yourself or others in the future, you simply cannot spend everything you earn.

All three baskets of success will be fuelled by savings... It's never too late to become disciplined about saving, but the sooner you develop the saving habit, the easier it will be to achieve your goals. You can start by creating a budget for the New Year: no successful company would establish a profit goal without estimating its operating costs in advance.

The same goes for individuals: if you want to free up enough cash to save the recommended 10 to 15% of your pay in 2007, you have to control your costs. Your number one goal should be to do a budget, keep track of your expenses for a couple of months. It's the smaller expenses like clothing, movies, phone bills and coffees that slip through the cracks and before you know it, there's not much left for savings.

Authors Thomas J. Stanley and William D. Danko in their book the Millionaire next door wrote:
How do you become wealthy? . . . It is seldom luck or inheritance or advanced degrees or even intelligence that enables people to amass fortunes. Wealth is more often the result of a lifestyle of hard work, perseverance, planning, and most of all, self-discipline.

Below are a couple of saving tips that you could use:

• Set aside any salary increments. If for instance at the end of this year you're given a salary increment of 10%, your cost of living doesn't change and your expenses shouldn't. Save that extra money every month like you didn't have it. An easy way to do this is to sign up for an automatic investment program, such as Old Mutual or British American unit-linked savings products.
• Cut your expenses. If you can defer making big payments e.g a new car while your current one is running ok albeit old, don't.
• Try monitoring your spending for a couple of months. Keep a spreadsheet and enter your expenses every day. When you itemize your expenses, it becomes easier to see where you can cut down

Louis R. Morrell, Basics of Investing, gives a distinction between saving and investing. Saving is a relatively short-term activity designed to provide a set amount of money at some point in the future, usually for a specific purpose such as buying a car. The major goal in saving is to avoid the risk that the amount objective will not be achieved.

Savings are liquid (easily converted into cash) and are usually used for such things as emergencies, down payment on a home, or a holiday. In contrast, investing is a longer-term in nature with the individual willing to accept more short-term risk in the expectation of achieving a greater long term gain. The goal in investing is not capital preservation but rather capital appreciation.

The dream basket is the third basket of success. In this basket you would have all the things that you don't need but would love to have... a yacht, a cruise around the world, a trip to the moon, a second home, or the latest Aston Martin! It is important not to have these baskets in the wrong order...

I hope to continue increasing financial literacy and letting the public know that you can indeed create wealth! It's just like Henry Ford statement, "the man who thinks he can and the man who thinks he can't, are both right; which one are you?"

Top EA Companies

East African Rankings

EA Rank	African Rank	Co. Name	Country	Industry	Market Value Dollar ($m)	Dollar Returns
1	75	East African Breweries	Kenya	Consumer Goods	2077	58.59%
2	96	Barclays Bank Kenya	Kenya	Banks and Financial Services	1677	12.18%
3	98	Mauritius Commercial Bank	Mauritius	Banks and Financial Services	1639	108.93%
4	145	Bamburi Cement	Kenya	Construction and Materials	1112	-0.32%
5	153	New Mauritius Hotels	Mauritius	Entertainment and Leisure	1072	110.45%
6	155	State Bank of Mauritius	Mauritius	Banks and Financial Services	1056	105.04%
7	167	Kenya Electricity Generating Company	Kenya	Utilities	954	3.74%
8	171	Kenya Commercial Bank	Kenya	Banks and Financial Services	889	29.31%
9	172	Standard Chartered Bank Kenya	Kenya	Banks and Financial Services	876	9.88%
10	195	Stanbic Uganda	Uganda	Banks and Financial Services	686	-
11	-	Equity Bank Kenya	Kenya	Banks and Financial Services	637	-
12	-	Illovo Sugar Malawi	Malawi	Agriculture and Raw Materials	524	-
13	-	Kenya Airways	Kenya	Transportation	458	-
14	-	Sun Resorts	Mauritius	Entertainment and Leisure	420	-
15	-	Nation Media Group	Kenya	Media	363	-

What is all this fuss about QII’s?

By Business Daily
Investment banks in Kenya have been classified as Qualified Institutional Investors (QIIs) in past initial public offerings (IPOs).

This classification has enabled them to buy loads of shares in their own names for onward allocation to their retail clients.

According to the Safaricom IPO prospectus, QIIs are identified as licensed collective investment schemes, investment banks, retirement benefit schemes, and life insurance companies.

The classification of applications for different investors has become hugely significant in recent IPOs as they determine the success of an investor getting a good chunk of shares applied for based on reservations for the respective categories.

Segmentation of applicaions for the various categories of applicants was necessitated by the outcome of the 2006 KenGen IPO that left institutional investors furious after they were allocated an equal number of shares with retail investors despite having applied for millions of shares.

Investor categorization has lately gained clout owing to the high demand for shares by small investors in IPOs that are coming to the market as part of government’s privatisation programme. This has diminished the pool of shares available to big investors, forcing investment banks to cushion their high net worth clients from being forced to take back huge chunks of their money in refunds.

Other application categories in the ongoing IPO in addition to the QIIs include the international applicants, retail applicants, Safaricom employees and authorized Safaricom dealers.
—Washington Gikunju

How You Can Choose the Right Investment Bank

Mururi Wanjuki

Once again, the heavens are open and it is raining IPOs in Kenya. Little is understood about IPOs in Kenya except that they "make money" and that share allocations are handed out in measly doses by mean investment banks. Even much less understood is the concept of investment banks which most of us cannot differentiate from stock brokerage houses.

How do they operate? We are told it will cost five shillings a share. Do they toss a coin to determine this? If you are seated in the boardroom sifting through various investment banks' proposals, both local and foreign, how would you go about choosing which one to use?

Investment banks function as intermediaries in a wide range of financial transactions. They are not simply IPO banks. They are experienced in carrying out projects that, for most companies, take place very rarely, but are critically important.

There are many types of investment banks that range from global full-service firms (such as JP Morgan) to boutique firms that specialise in a particular industry or product (such as First Africa Capital specialising in Mergers & Acquisitions). In Kenya, the market is not deep enough to support such a specialisation and investment banks do not therefore focus on what may be described as niche markets.

Investment banks provide four primary types of services: raising capital, advising in mergers and acquisitions, executing securities sales and trading, and performing general advisory services. Most of the major investment banks are active in each of these categories. Smaller investment banks may specialise in two or three of these categories.

An investment bank can assist a firm in raising funds to achieve a variety of objectives, such as to acquire another company, reduce its debt load, expand existing operations, or for specific project financing. Capital can include some combination of debt, common equity, preferred equity, and hybrid securities such as convertible debt or debt with warrants.

Although many people associate raising capital with public stock offerings, a great deal of capital is actually raised through private placements with institutions, specialised investment funds, and private individuals. The investment bank will work with the client to structure the transaction to meet specific objectives while being attractive to investors.

Investment banks often represent clients in mergers, acquisitions, and divestitures. For example, projects include the acquisition of a specific firm, the sale of a company or a subsidiary of the company, and assistance in identifying, structuring, and executing a merger or joint venture. In each case, the investment bank will provide a thorough analysis of the entity bought or sold, as well as a valuation range and recommended structure.

Investment banks' sales and trading services are primarily relevant only to publicly traded firms, or firms which plan to go public in the near future. Specific functions include making a market in a stock, placing new offerings, and publishing research reports.

In performing this role, the investment bank simply buys and sells securities for people, whether they are equity (stocks), fixed income (bonds), currencies or commodities (oil and gold ).

They will have brokers whom you can call to buy 100 KQ shares, but in most developed markets their clients will typically be money managers, pension fund managers, foreign governments, commercial banks, insurance companies, etc. moving colossal amounts of money.

Their general advisory services will include assignments such as strategic planning, business valuations, assisting in financial restructurings, and providing an opinion as to the fairness of a proposed transaction.

So, who needs an investment bank? Any firm contemplating a significant transaction can benefit from the advice of an investment bank. Although large corporations often have sophisticated finance and corporate development departments, an investment bank provides objectivity, a valuable contact network, allows for efficient use of client personnel, and is vitally interested in seeing the transaction close.

A quality investment banking firm can provide the services required to initiate and execute a major transaction, thereby empowering small to medium sized companies with financial and transaction experience without the addition of permanent overhead. What do you look for when appointing an Investment Bank? Investment banking is a service business, and the client should expect top-notch service from the investment banking firm.

For all functions except sales and trading, the services should go well beyond simply making introductions, or "brokering" a transaction. For example, most projects will include detailed industry and financial analysis, preparation of relevant documentation such as an offering memorandum or presentation to the Board of Directors, assistance with due diligence, negotiating the terms of the transaction, coordinating legal, accounting, and other advisors, and generally assisting in all phases of the project to ensure successful completion.

t is extremely important to make sure that experienced, senior members of the investment banking firm will be active in the project on a day-to-day basis. Depending on the type of transaction, it may be preferable to work with an investment bank that has some background in your specific industry segment. .

Although no reputable investment bank will guarantee success, the firm must have a demonstrated record of closing transactions.

Ability to work quickly. Often, investment banking projects have very specific deadlines, for example when bidding on a company that is for sale. Generally, an investment bank will charge an initial retainer fee, which may be one-time or monthly, with the majority of the fee contingent upon successful completion of the transaction. Having worked on a transaction for your company, the investment bank will be intimately familiar with your business.

After the transaction, a good investment bank should become a trusted business advisor that can be called upon informally for advice and support on an ongoing basis.The prestige and cachet of a top-tier investment bank lends credibility to a transaction, especially an IPO, when the issuer is not well known to the public or to potential investors.

The investment banker has a vested interest in making sure the transaction closes, that the project is completed in an efficient time frame, and with terms that provide maximum value to the client.

At the same time, the client is able to focus on running the business, rather than on the day-to-day details of the transaction, knowing that the transaction is being handled by individuals with experience in executing similar projects.

The Power of a gang

Many Kenyans, seeking to aggressively grow their capital, are increasingly investing in groups. Staff writer JUSTUS ONDARI looks at the pitfalls and engages experts on how to avoid them Forced to embrace an age-old tradition of pooling resources to avoid saving slowly individually, Kenyans are suddenly holding millions of shillings raised through investments clubs. Already saddled with tight work schedules, most club members are facing a major challenge: choosing and managing their investments. With the stock market — which had become a darling to most capital owners — taking a beating from the recent post-election violence, the patience of these investors is being stretched to the limit. “If the objectives of the young investors are not met within a very short period, their patience runs out because they have a short horizon and high expectations,” says Mr Francis Lewah, an independent financial advisor with the ProFin Group, a local investment consultancy. A case in point is Right Thinking Group (RTG), an investment club comprising Samwel Ngotho, Muiruri Mburu, Simeon Okello and other five members. Determined to avoid the financial hardships graduates face after university as they look for jobs in a tight market, the former Moi University students set up the club in 2005. So fired-up were the then third-year students that when the Kenya Electricity Generating Company Limited (KenGen) initial public offering (IPO) came up in March 2006, they were among hundreds of Kenyan investors who joined the Nairobi Stock Exchange (NSE). Two years down the line, they have an investment portfolio of about Sh100,000 in cash and shares through their club. Although an upward review next month of their monthly contributions to Sh4,000 from less than Sh2,000 stands to benefit the club’s kitty, the eight friends are scratching their heads. “Given the latest developments at the stock market, please how can we invest our money to meet our objective of being millionaires by 2010?” The group asked in an e-mail sent to Money by Mr Okello, the secretary-general. Yet they are not alone. Another investment club of eight women in their late 20s and early 30s — six doctors, a lawyer and a pharmacist — has raised more than Sh1 million in cash and bought 30,000 shares at the NSE in less than two years. Ms A. Mumina, one of its officials, says despite their efforts come up with an investment plan that would ‘grow’ their money, they have not been successful in growing their capital. The situation is complicated by their individual hectic schedules, both at work and home, making it difficult to venture into a project that would need constant attention since they are not investment experts. “What opportunities can we explore to meet our investment objectives?” asks the group. Whereas the legal framework of the clubs may range from informal social groupings to more formal limited liability companies, their core objective remains the same—pooling assets to generate wealth. Operational structures Unfortunately, most groups do not have operational structures and rely on haphazard investment decisions many a time with no professional input. As a result, most end up with too much liquid cash held in bank accounts thus losing value to inflation or investments in shares at the NSE, whose underlying fundamentals they barely understand. Mr Fred Nyayieka, the general manager of Liaison Financial Services, says coming up with realistic objectives and understanding how to effectively meet them could make the difference between an investment group achieving or failing to fulfil the members’ aspirations. Investment clubs incepted in the 1960s, 70s and 80s are usually pointed out as success stories while the recently emerging groups are mostly failures. This is because one common feature of modern start-ups is the urgency to grow rich. As a result, and in the absence of an investment strategy, most groups speculate on any investment to generate returns only to end up losing money. Another feature is where groups contribute then start looking out for investment opportunities. One needs to know where to put the money long before getting it. This enables you to focus on the initial objective. The other feature is putting all the money in one asset. Most groups would buy only shares at the NSE and more so is a single counter. The risks are very high and should the asset class under-perform, the entire portfolio would be at risk. Mr Nyayieka says individuals investing together does not mean that they need to be experts in investments to succeed. Actually, an investment club does not need an investment expert within the it to achieve its goal of generating wealth. Even in cases where an individual has entrusted investments with experts, they have at times lost money as is common in equity-linked unit trusts, he says. One major weakness of most investment groups in Kenya is failure to formulate investment strategies. There is no way a group can achieve its objective of investing without a strategy. It is the lack of strategy that leads to haphazard investment decisions like buying into investments that sometimes do not match the core objective or even profiles of the individual members. For instance, for the eight former Moi University students to meet their objective of being millionaires, they must have at least Sh8 million – one apiece — by 2010. Assuming that they can only invest in formal investments ranging from equities and fixed income instruments to property and offshore, the low risks associated with such investments means the returns may not be as high as one would expect from high-risk business. In trying to project income if they contribute Sh4,000 per month to the end of 2010, they would raise Sh1,252,000. An assumed annual return of 30 per cent per annum for the next three years returns an absolute income of Sh811,200 representing 64.79 per cent in three years. The total fund thus works to Sh2,063,200. “It may not be possible for the eight to become millionaires in three years at the rate of Sh4,000 monthly contributions,” Mr Nyayieka observes. He also feels that going for a loan to bridge any funding gaps may not be a good idea because it is the net value of the investments that matters. That is, if the group ends up with assets worth Sh8 million and probably an equal amount of liability, then it could negate its main objective. “As a fairly young population, the members have a longer horizon to achieve their objective and there is no point in taking very high risks now that may jeopardise the security of their savings,” Mr Nyayieka warns. Mr Fred Mweni, the managing director of Tsavo Securities Limited, points out that in making an investment decision, club members must remember that the higher the return, the higher the risk. “If you want to make high returns and at a faster rate, then you must also be ready for high risks, including losing all your money at one go,” says Mr Mweni. Mr Maina Wanjigi, the former Cabinet minister and entrepreneur who has been involved in investment clubs in the last 15 years, says the culture of having a uniform contribution among club members is the key driver to reckless investment decisions. “Rather than turning the contributions into shares so that contribution is based on ability to pay, members try to maximise the returns of their low contributions by investing in risky and often wrong ventures,” says Mr Wanjigi. “Investment clubs have a social element and hence individual contribution should not be punitive.” He is the a member of two very successful clubs, Critical Mass Group with 33 members and General Mobilisation of Capital which has a membership of 40. However, in choosing an investment option, it is useful for club members to appreciate that there are two broad classes — direct and indirect investments. Direct investments involve starting or investing in a venture that you must oversee its management. For instance, whereas a group can invest in a manufacturing venture and employ managers, the liability still lies with the group members as much as they may not be involved in the day-to-day management. Indirect investment is where a group can invest in a broad range of assets whose management they have no relationship with, like investing in shares, fixed income instruments like Treasury Bills and Bonds, offshore markets, unit trusts and unit-linked life funds. Such investments are managed by independent entities. Indirect investment is ideal for majority of investment groups given the amount of time required, which makes it difficult for members. Such investments require professional input. Before settling for an investment, there are a number of considerations. A group, like a company, must have a vision. Secondly, the group must come up with a mission statement on how to achieve the vision? Formulating values would also guide relationship within the group and with other outside parties. The vision of the group lays the foundation for the investment strategy. If, for instance, a group’s vision were to be a leading investor in commercial or residential property in a city within, say, 10 years, it would formulate an investment strategy spanning a decade to be reviewed periodically. Then there is the short- and long-term strategy. To own a prime commercial or residential property in a city within 10 years does not mean that such a group starts investing in land from day one. Indeed such a group’s asset allocation may not include property for a long time even for the first nine years. Further, investment in property must not constitute the entire investments because of the risks of investing in one assets class. For example, in allocating their current contributions, Mr Nyayieka advises the eight former Moi University students to focus on key investment markets beginning with the NSE, unit trusts and later in property depending on the trends. This view is shared by Mr Wanjigi. “Investment clubs resources should not be put into high-risk ventures. If any member likes risky ventures, let him or her bet personal resources,” says Mr Wanjigi whose club has invested heavily in property. This has some element of truth given that the most successful groups in the country are land buying companies that sprung up after independence. But as these groups met their objective of buying land they become irrelevant and ultimately majority fold up.

The former minister also says clubs should not be seen to be competing with members in their investments. “A club should not, for instance, buy a few shares that an individual member can afford on his or her own as this would affect members’ interest,” Mr Wanjigi says.

When to ditch your stocks

By Amanda B. Kish, CFA March 26, 2008

Quick question: What's the fastest way to make millions in the stock market? Easy -- buy a handful of high-quality stocks and ride them to riches.

Unfortunately, it's not always that simple. Although investors may think they have a lock on knowing what and when to buy, more often than not they forget the flip side of that equation -- knowing when to sell.

Parting is such sweet sorrow
Although investors may be able to hang on to some stocks for years or even decades, fundamentals do sometimes change, and the reasons for owning a stock in the first place may no longer apply. None of us likes to admit that we're holding on to a loser, but investors need to examine their situations dispassionately. There's a big psychological barrier in place when it comes to selling stocks, so if you can get around that wall and let go of investments at the appropriate times, you'll be light-years ahead of most.

For example, take the recent sell-off in financial stocks. Falling housing prices and troubles in the mortgage market slammed financials across the board. This has been an equal-opportunity sell-off that has punished stocks regardless of whether their underlying fundamentals have been affected.

Put simply, times like these call on investors to re-evaluate their holdings.

Of course, remember the baby and the bathwater
There are some financial stocks that have been beaten down but still maintain great long-term prospects, such as Wells Fargo, Bank of America, and BB&T. Despite the recent turmoil, the long-term bottom line is unlikely to be strongly affected at these companies, given their financial strength and operational diversification.

On the other hand, some companies have been inflicted with long-term damage from the credit market fallout. It's unlikely that Washington Mutual, which has significant mortgage exposure, will revisit recent highs anytime soon.

In cases like these, investors may need to give serious thought to selling. And although many will want to hold in hopes of regaining some of that lost ground, it can be worthwhile to cut your losses and redeploy that money elsewhere.

Bringing in the backup
Of course, if you don't have the stomach for constantly reassessing whether it's time to sell your stocks, there is another solution -- investing in mutual funds. Why not let an industry expert worry about making the sell decision? After all, he or she generally has access to information, resources, and personnel that individual investors do not.

The Learning Centre: Investing in Shares 101

Investing in Shares

by: Rina Karina, 2 Feb 07

The most frequently asked question by potential stock market investors is "what is the best stock to buy". This article is aimed at demystifying the stock market and providing a foundation for investment knowledge for those who are new to the stock market.

Knowing your objectives for the future is the starting point in determining the type of investment you make today. Investing in shares can be one of the most flexible, lucrative and rewarding forms of investment there is.

A share is a piece of ownership of a company or enterprise. When you buy a share, you become an investor and thereby an owner of a piece of the company's profits or loss. By and large, it is companies that create wealth in the global economy. But, in order to generate that wealth and take advantage of new opportunities, companies require funding. Some companies choose to borrow and pay interest on loans. Others give up a degree of ownership in the company and issue shares (or equity). Those companies that choose to offer their shares to the public are known as public companies and these shares are bought and sold on various stock exchanges throughout the world.

The two types of return on an investment expected by shareholders are:

• Capital Gains
• Dividends

Capital gain is a gain on the initial sum invested as the price increases. If for instance, Uchumi Supermarkets Ltd moved from KShs 10.00 to KShs 16.00, the capital gained by the investor would be KShs 6.00.

Dividends are like a small reward companies pay shareholders for owning shares of its stock. The company generally takes a portion of its earnings, which it divides and distributes to shareholders. In general, a company that has a slow growth rate (few investment opportunities) pays high dividends. On the other hand, a company with a high growth rate usually pays no dividends all as their profits are reinvested to help sustain higher-than-average growth.

Every purchase involves a degree of risk. There is the risk that relates to the market as a whole - for example, if interest rates rose, or if political instability increased, companies across all sectors would be affected. There's not much an investor can do to counter this kind of risk. There is also the risk that relates to a specific stock. An example of this unique risk would be if for instance you have invested in Oil and Gas Petroleum company, and they're waiting for some important results from digging an oil well based on some scientific exploration that had been carried out. The wells they dig may have oil or may be unsuccessful. Petroleum exploration is very costly, deals with many unknowns, with high risk and uncertainty. The risks of holding that particular share to the exclusion of all others would be large. The way to minimize this unique or stand alone risk would be through diversification.

Several general factors cause movements in share prices. These factors are:

• The general view of the economy as a whole
• The conditions related specifically to the company's particular industry sector and
• The performance of the company itself.

How these factors are viewed is rather subjective, one's decision to buy or sell a company's share will be based on their view of its prospects relative to its market peers.

So what is the best stock to buy?

There are several qualities to look out for when purchasing shares:

• Company sells a good product/service that does not have close substitutes, have a competitive offering and one that has potential for continued growth.
• The company is managed productively, transparently and is accountable to shareholders.
• Competent Management team
• No wastage in the use of resources, and increased potential for growth in the future.
• Respect for the shareholders and their opinions
• Liquidity - (Shares should be easy to buy and sell quickly in the market with relatively low appreciation/depreciation in value)
• The company abides by the rules, regulations and laws set by the CMA and the Laws of the country within which they operate.
• Shares of company that has continued growth in earnings, stable or increasing profit margins and a strong balance sheet where the debt to equity ratio is not too high - the lower the debt the better.
• Consistent operating history.

Your decision to invest will be a lot easier if you inform yourself.

The fundamentals of investing in equities are simple. Once these are grasped, the level of knowledge you can acquire is virtually limitless. There is a huge amount of literature on the subject of investment.

To make the most of your investment, we advise that you monitor the activities of the NSE on daily basis. We encourage investors to read business pages of the daily newspapers, business magazines and write-ups in the electronic and print media and leading financial journals and to be in regular consultations with financial advisors on regular basis.