Warren Buffet: invest in what u know & other priceless gems

A must watch docu-info for experienced and aspiring investors alike. And remember, buy low, sell high

Living abroad and investing

Just some observations:

Middlemen- cut them out or to absolute minimum. That includes relatives, "friends", brokers et al.

The more liquid an asset, the better.

Remember exchange rates matter.

Legal recourse in Kenya can be long and expensive.

Returns in motherland can be awesome.

Timing is important, therefore avoid herd mentality.

Invest in things you can monitor easily. This might mean investing locally.

DYOR

Does universal banking have a future in Kenya?

Universal banking is the term used to define banks that are one a stop shop for any combination of depositors, lenders and or investors and insurance seekers. Globally, Citi, UBS Bank of Tokyo Mitsubishi and the newly formatted BofA are typical egs of universal banks. In Kenya, we have 2009 Equity and CFC Stanbic.

The key driver for this type of banking has always been the economies of scale in costs and knowledge and products. That is the upside...

The downside which has rarely been priced in the past is that the management matrix and knowhow required to centrally manage such businesses has been huge and as yet, there are few successes. The outcome of this is that management is delegated by default to those knowledgeable in the various facets e.g. an investment banker is given the remit of running the show on the ib part of the business and ditto for the insurance part of the business. This has then lend to a situation where its difficult for the ultimate bank ceo to get a handle on a daily basis what his/her value at risk from the universal bank. Cue the sort of big issues we've seen with these types of banks in the current crisis.

Given the embryonic state of banking regulation in Kenya (is no where near adapting Basel 2 type of capital/ liquidity requirements), it currently is prudent to encourage universal banking without either very targeted regulation of the various parts of such a bank.

Insurance as an investment/saving product

To invest, you mostly have to have saved unless you are the type who does investing for a living in which case you can use leverage. Savings will come from your disposable income. To create the room for enough disposable income, you either increase your income; reduce your spending or do both. One-off big ticket expense items can derail your saving/investment strategy. Even if you earns zillions, having to buy a central heating system or replace a broken electrical home appliance will skew your savings targets.

Which is where insurance comes in. By insuring some of these big-ticket items, you'll typically be able to claim either on the repair work or the replacement. And although, you may not need to claim every other month, saving yourself that once a year cost is sufficient reason for taking out the insurance product.

Giving NSE some bouyancy

The reasons for the current fall and stale state of the NSE are various and now well known:

• Brokers' embezzlements
• Economy messed up by (a) PEV (b) drought (c) bloated GoK (d) public crowding out private sector
• 2012 and bleak outlook
• Bonds taking up the liquidity
• et al

Some of the above won't change unless we see radical moves like UK or Ruto in handcuffs on their way to Hague. I think bonds have some way to go given its the latest kid on the block and corporates are now queuing up to go through this avenue.

However, the NSE can attract attention back to itself in the following ways:.

1. Share consolidation: while (i) sharebuy back legal stuff is being sorted out and in any case will probably be too expensive in the medium for any firm to contemplate doing (ii)the cheaper share consolidation is easy to do and will give shareholders, brokers and the firms themselves a consolidated cheaper way of managing the quantity of shares. Safaricom being the share that indirectly started the current bear should kick-off the stage by doing a 10 for 1 share consolidation. This would mean 40 shares if you currently hold 400 and so forth. Equity could then do a 2 for 1.
2. Shorting: a hobby horse of mine where the NSE is concerned. It will probably be the single most educative instrument that can be introduced to the NSE. Because it allows an investor to make returns and take a view whether a share is rising or falling, NSE investors will no longer think of shares as endlessly rising investing instruments. Clearly, brokers will also have two more avenues for revenue generation. How about concerns re margins?Initially, the movement when shorting could be limited to a 20% loss at which point the investor would have to come up with the cash to cover his losses.
3. Bring up NSSF: UK obviously banned NSSF from new share purchase to facilitate liquidity in the bond market. In the medium and longer term however, its a silly policy to ban one of the deepest pockets in the land from a capital market. An oxymoron if you like.

Saying all that, an NSE at 2,500 is a very welcome re-entry for me.

What type of CBK governor does Kenya need?

With a few exceptions, the two main functions of a Central Baank in an economy are

1. Control money supply
2. Prudential supervision of the banking/financial system

In performing these functions however, you tend to get three types of people (men in the main) who head up the Central Banks:

1. Patron governors: These are in effect there to support the economic policies of the government of the day. So they'll adopt monetary policy and in some cases, supervisory policy to the govt's economic policies. As an example, in the US we had Greenspan who in support of credit-based economic growth adopted loose banking regulation (even going along witht the idea of awarding self-regulation to some of the larger ibs). In Kenya, we had men like Kortut who was very supportive of the export intiatives that Pattni had come up with or even Mullei who was able to relax the reserve ratio in 2003 so that banks could lend more. In Nigeria, Chukwuma Soludo presided over the introduction of margin lending which indirectly has brought the Nigerian banking system to needing bail-out.
2. Clean-up governors: Patron governors with a few exceptions, always create a mess. Guaranteed. Because their policies are not rooted in the basic functions of a central bank, these types of governors wonder into unfamiliar territory which (a) they don't understand (b) can't not then control. Greenspan was talking about cleaning up the mess created by "irrational exburance", but he really didn't know or understand what he was talking about since the scale of the bailout has been huge. Clean up governors therefore have a thankless task of undoing the work of patron governors. Cheserem did this in Kenya in the mid 90s.
3. Independent governors: In effect perform the function of a central bank and are thus usually quite unpopular only surviving due to a change of government. Mervyn King has done this to a certain extent. In Kenya, we are yet to see one but urgently need one.

Agriculture food exchange

As this FT article shows, agriculture exchange would resolve two problems that have hampered farmers from growing their farming as a business:

1. Pricing: many farmers especially those dealing in perishable horticulture produce typically rely on rumours on what prices are. An exchange close to home will be able to relay the information much more cheaply

2. Transport: never mind the roads, due to (a) lack of enough cars (b) fuel costs; farmers typically have to shoulder the costs wrought by these two factors thus minimising their returns.

Stockmarkets retrace on the way

After 6 months of almost uninterrupted rise driven by a huge sigh of relief at surviving the largest financial crisis since the South Sea bubble, we may have a retrace shortly. A rise of 60% seems overdone given rising unemployment; budget deficits which suggest that while the economies are recovering, the recovery is not going to be anywhere as fast or as strong as the markets have factored. I therefore expect markets to fall by around 10% in the coming fortnight but thereafter start a slower upward movement as financials start reporting in early November.

Thinking of having kids?

One of aspect of financial life that no one can really plan sufficiently for, is how your finances change once you get married and then have children. Having kids and seeing them grow is both a blessing and very satisfying. Infact, a perfect tonic to a busy life. However, its good to be realistic and know its a lifetime commitment which should be borne in mind when planning your economic/financial life.

Handily enough, the UK FSA has come up with a calculator that gives you a rough idea of how much it'll cost you to bring up your kids.

Play away.

The KenGen Ksh15bn bond beneficiaries

Going by the debate so far, the 12% bonds seems to have tickled the interest of retail investors who usually stay away from bonds given the return is far lower than current or expected interest. Ther reasons for this change are many but a major one would be changing perceptions about the NSE. How will the different players benefit from this bond?

• Retail investors:- despite a drop in inflation, its unlikely that it'll go below double figures before 2012. That means that in real terms, a retail investor will be making a loss from investing a Ksh100k of his in the bond. Although its unusual in Kenya, you may not be able to get the full principal in the first 2 years. It'll be 2017 before you double your money.
• High net worthy: If you have Ksh5m and the risk-aversion of a typical elderly investor, then the 12% is sound return. However, NSe shares pay over 10% in dividend alone.
• Money market fund managers: will love this bond because it make them very competitive against savings accounts.
• KenGen shareholders: interest payment of just over a Ksh1bn will hit the P&L every year. In the first few years, there will be no concomitant revenue from the project to offset this. Something to ponder?
• Electricity consumers: should hopefully see fewer rationing episodes.

The bond offer closes tomorrow.

Living abroad: When in Rome...?

Having lived in London for 10 or so years, I have seen wazalendo get ripped off here and in the motherland. And I think this mainly happens because of the society we come from. And secondly and more importantly, because we forget the cardinal lesson that those conquered by the Romans learned in third century.

The first one affects us in that, we are used to living in a society/country where most systems (especially government-related) don't function as they should. Because these institutions don't work well, we are used to shortcuts to get things done. We are used to services that are not delivered professionally. So for example, most land offices won't ask you for any id to see documents or you say you will bring the id tomorrow. Thus when we encounter systems that work, we surely find dificult to process whatever it is we need to get processed. Just look at these tragic examples of Kenyans trying for US papers. If its possible, its wise to engage the advice of peeps who've gone thru the same process successfully.

For those of us who God has given opporunity to land abroad, our problems seem to be varied though not insurmountable. A few examples:

• we like our drink and driving. In most of the western countries, this is a huge no no and is a deportable offence. I've lost count
• The law is the law. Lots of black and white situations (i.e. no room for your interpretation) across the bureaucracy.
• Lack of papers means many of us do a lot of underground/menial jobs with no bank accounts and the like.
• Strong motherland bias in investing.
• Loneliness- no weekend relas or easygoing friends...Race is an issue
• Living costs are 4 times higher than Nai in some cities abroad
• Family life is not easy. No mboch or you get expensive childcare. Discipline your kids at your own risk.
• Relas in the motherland expect instant returns adding to the stress.
• Failure to appreciate social situations especially awkward pc ones.
• A significant proportion of our students never complete because of economic situations-note that in some countries students are only allowed to work for given number of hours e.g. 16 per week in the UK.
• Cramped or unhealthy accommodation.
• and the worst, getting ripped off by relas when you entrust them to look after your ventures in the motherland.
• And expecting the law to be on your side in the motherland...

But, its possible to successfully conclude your education and even get jobs provided, one makes it there first call to know the dos and don'ts legally and system-wise.

1. If you are a prospective student, think not about what your mate is doing but what is your calling. That way, you will be able to endure.
2. If you are a student, aim high because lecturers and tutors can be your best reference for jobs in your study nation. Some countries are now giving students 1 yr job visas. Its an awesome situation to make yourself indispensable to your employer.
3. If there is a job opening, stay out of office politics, pray your boss gives you the portfolio your qualification deserves and work hard like a Kenyan. You'll shine.
4. If you are here for a visit/a few £s, learn what can jobs pay with minimum farce and supervision.
5. The west is an individualistic society. Take the opportunity to build and discover you.
6. If you can get married and appreciate the cost and difficulties of bringing up your kids here, do so especially if you are a guy. Otherwise, the pubs are waiting to drink your sweat.

Finally, this is one of most inspirational songs for nrks. Loosely translated, you are wherever you are for a reason. And whatever hardship you endured getting there, you'll go back fruitful.

KACC: Prevent, Convict & Recover Assets vs Corruption

While many have focused on the kibz illegality (in spirit and law) in re-appointing Ringera, we've overlooked the criteria by which we should evaluate his tenure and KACC's in general. On this criteria, KACC either be closed or revamped as something completely different. Summarising KACC's functions leaves with3 core ones against which you can evaluate its success

1. Prevention: by educating; campaigns; facilitating whistleblowing; following up and taking forward credible complaints of corruption. And probably the easiest, using the public wealth declaration forms to pursue GoK employees. Corruption is far worse now than it was in 2003 when KACC came into being. I know and I'm sure others know many who went to parliament in 2002 as paupers and are fabulously rich today. Murungaru is an example. He was facing an auction in October 2002, but today he is... So where is KACC?
2. Convicting of the corrupt: This is more the role of the Ag and DPP, but do note that KACC has to present fool-proof evidence of corruption. Crucially, note that KACC can institute civil proceedings where it has evidence that taxpayers money has gone missing via corrupt actions. On either fronts, it has not done so. Even it has presented evidence, I believe only Margaret Gachara has ever been convicted of corruption and even in her case, KACC never went ahead to recover assets.
3. Recover of Assets: Biggest failure in my books. From Goldenberg, Ndung'u commission, Anglo-Leasing there has been evidence that taxpayers money was diverted to private pockets. I believe Ksh78bn was mentioned for Goldenberg alone. Ksh4bn that it has recovered is probably what KACC has spent since 2003.

On the above criteria, its fairly obvious that KACC has failed and we need to move on...

NSE: where is hope?

After the subprime crisis, market comentators and economists have now realised how important a role Keynes' animal spirits play in market movements.

From a fundamentals point of view, the NSE should now be seeing a recovery given power rationing is being reduced as well as the forecast El Nino portending better food output.

The reason its not rising is lack of hope among potential and existing investors thanks to the messed up leadership and the future.

It was a u/v curve

Today 1 year ago was a fairly traumatic day not least for Lehman Brothers folk who turned up to work only to be told no pay no job et al. While there is generally little sympathy for big bank-bursting bonus earning folk getting made redundant, the effects were felt world-wide and are of course still reverberating today with many unit trusts and hedge funds who had or offered clients exposure to Lehman Brothers' structured products suffering.

The main thing though is that tremendous amounts of money and measures such govt stakes in banks and quantitive easing have resuscitated the banking system thus allowing markets to start playing their signalling role. We are far from out of the woods, but all signs are that economies will be able to self-sustain beyond govts exiting from financing banks and economies.

Irony? Well, the preceding bubble was in the main caused by a benign interest rate environment allowing banks to borrow locally at low rates and invest in toxic assets for high returns. And the instrument of choice for allowing economies to recover? Zero interest rates...

Aligning bank's size to the economy

After you've

• set required capital ratios
• asked banks to holds capital against every balance sheet
• hold the right type of capital- unencumbered permanent share capital
• request a "will"
• request banks' single counterparty exposure be limited to a multiple of capital

You still won't have tackled the largest elephant in the room so to speak. That is banks that are so large that you don't want them to fail because the cost of rescuing is too prohibitive. Socially, financially, economically locally and maybe even globally, these banks become a threat with economies of scale outweighed by externalities.

The answer is a removal of a one-size fits-all and move to a more dynamic capital adequacy system. Regulators and governments set minimum capital requirement with reference to the growth in the banking industry's lending as a proxy for the economy.

But then for banks that are growing, you require that they adjust their capital ratios in line with year on year the growth of their balance sheets. Similarly, those that particularly large should have higher capital ratios.

The methodology is intuitive and can be applied even to simple regulatory systems like Kenya's. i.e. while each bank must have a Ksh1bn plus, those that are growing fast or the top 10 should hold higher capital Ksh2bn and the top five Ksh3bn or higher capital ratios.

Kenya's population growth: time for the China solution?

We are poor nation in money terms.

• Kenya's population stands at around 40mn having doubled over the last 25 years.
• It’s growing at 2% per year which means it is on schedule to double in 2050.
• In real terms, our GDP has stood still since 1995 in real terms (that is 2002-2006 was merely to get us on even keel with 1997 and before and years since have been eroded by double-digit inflation). The economy as its structured currently can't double in that period.
• 65% of our population ekes a living from agriculture. Though this percentage will decrease in term, the total rural population will still account for around 50% by 2050
• Only 8% of Kenya's land is arable
• Without a sharp reversal, the current environmental degradation coupled with land issues, may well reduce this proportion of arable land to around 6%.

China was faced with similar circumstances in early 70s, its population having doubled within a period of 30years and with a static economy and agriculture growth. It worked what was its optimal carrying capacity based on its ability to feed its people (given arable land, land and economy growth potential) and instituted what is today known as the "one-child". It was actually more nuanced than that i.e. the one-child policy only applied to urban cities and didn't explicitly preclude having more than one child.

Is the population control needed for Kenya? Well, going above, a definitive yes. Is a China-type policy practical? Yes, GoK would offer to educate one child for free all the way to secondary school provided the parent/s only had the one. The parents would then have to pay for any additional ones.

Credit where its due: Kenya High Comm (UK)

At the Kenya High Commission in the UK, I believe as a Kenyan that you can experience how good Kenyan civil servants can be at delivering. A new passport application will typically take around 5 weeks. There is actually faster that it'd to get a British passport, but is also a smoother process. That is, you go online and print out the application form, you're told what other documents you need; how much it'll cost you and which mode of payment is acceptable. If you submit at their office, you'll get the option of the new passport being posted back to you or you get a phone call when it is ready to pick up and you just go there between 2-330pm. And that’s that. While at the London office, you'll get a pick of glossy magazines such one from Magical Kenya. I usually take away copy and give to colleagues and one or two have booked safari tours on that basis. A word though about the Kisumu2007 glossy. On the face of it, it has the GoK emblem, but has clearly been done by some of those NGOs to justify their extravagant lifestyles in Kenya. Some quotes "the Nai to Kcity road is a good example of the many complaints about neglect of roads in certain areas". And they are trying to market Kisumu!

The High Comm has also involved itself with nrks in the UK to a very high degree, attending most events that with a Kenyan theme. Unusually, its website is updated regularly.

All in all, Kenya High Comm gets my vote for civil servants we can be proud of.

Breaking news: NSE Brokers release financial results

Kudos Stella, these are two steps forward. Next thing is to introduce a uniform financial proforma. 4 lines of income (brokerage fees, advisory, profits/gains on investments and other); 4 lines of expenses (staff, admin, financial cost and other), capital and cash flow statements.

I will update as they come in, but clearly, a lot of questions/eye-brow raising stuff. No more than Renaissance. It made Ksh885m profit in investments in H1 2008 and zero in H1 2009! Believable? Well...

Although not a broker, Dry Associate is an interesting case study for where some of these brokers need to go to. Very little dependency on brokerage commission… primarily placement (of CPs I think) but very stable. Perhaps a merger candidate for Sterling IB.

Eagerly awaiting D&B, Gengis and Ngenye Kariuki's numbers...

Loss-making brokers? Need to get real

It must be for incompetency that stockbrokers have not been as profitable as banks in Kenya. Stockbrokers get Ksh2 for every Ksh100 transacted. Doesn't sound much. The total NSE' valuation was around Ksh1trn or just over that during the bubble period that peaked in last August (in transaction value terms). However only a fraction of that (infact around 10% at its highest) is ever transacted (bought and sold) in any given month. The monthly average transaction is under Ksh2bn. Thus 18 brokers (and shrinking) get to share Ksh20m in commission. And its not an equal cake hence some won't get even the Ksh20mn. However, even when you assume that each of the 20 employees (on average) gets Ksh0.5m per month, additional costs won't come to Ksh10mn per month. Therefore, with a few exceptions, its difficult to understand why the brokers have the issues they've had with profitability.

Going forward, brokers (new or old), will only guarantee profitability (and therefore survival) if

a) they can change the transaction charge structure so that each broker can charge as they wish, but also complete on service level and variety of distribution channels (including the cheap internet option).

b) either focus on volumes or transaction size, but this is already a target market by the likes of D&B, Kestrel Capital and SIB who rely on big clients making big transactions.

c) chase after the illusive ib trade of which there are already some ibs that get the choice business.

d) throw themselves at the mercy of the big deep pocketed banks.

Profetha, banks are not lending because...

A bank borrows from A and lends to B. The borrowing bit is called deposits and the lending bit is called loans. If it borrows from the raia, a bank rarely pays anything to borrow this cash, but will charge the same raia a considerable premium for lending to him/her. If it has borrow from other banks or other companies, it may have to pay something for the deposits. It can also borrow from the CBK, but its not called lender of the last resort for nothing. It'll sometimes demand explanations or a premium.

Simple maths will tell you that it makes a higher margin if it can borrow from the raia. Even more if it can lend back the same to that raia or his/er ilk.

Alas, we have times of plenty and times of scarcity. In times of scarcity, the bank can't borrow from the raia. It thus needs to pay to more to entice another raia or other entities to part with their cash. The other side of the equation is that the broke raia doesn't keep his/er loan repayments. The bank discovers things are thick. It decides that'll only lend to the select few who ordinarily don't to borrow anyway.

CBK wakes up and realises things are not well and its whole system is afire. Reducing the rates it charges as lender of last resort has no impact.

Professor that is where things are. Economy has no electricity to power businesses or consumers. Basic necessities are now luxuries such as flowing water and even food in some cases. It'd make more sense to have a word with the man up the hill...