Category Archives: money101

Cutting the Big Deals

A guest post by Shiroh.

Many people ask me how to make money especially because I work in an institution that helps people make money. I don’t know the answer, as I have little wealth myself, but I can give a few tips that I have learnt from those who do.

1. Read widely: Most people get information when it is no longer useful. Information is power, so the adage goes. Get information when it is hot. Don’t buy a share when the owners have already issued a good dividend – instead monitor the activities of that particular company for a period of time. Read the financial statements and its notes. The likelihood of making money when the dividend is announced is almost zero. Instead, read about the acquisitions/mergers the company is making. For example, what is the impact of Kenya Airways buying new planes? What is the effect of the international debt that Kengen and Safaricom keep taking periodically, on the company’s future profits? In short, do your research, and stay extremely informed.

Also read personal finance books and blogs. If there is one book I thank the heavens for, it is Rich Dad, Poor Dad. This is the book that introduced me to personal finance. These books are available everywhere, and have a look at them as ignorance is not bliss.

2. Have the money ready: If you are like any other Nairobian, you live from one pay slip to another, or you are on the verge of taking a credit card because the money is no longer enough to last a whole month. When deals come, it is your ability to pay for it, mostly in cash that counts. If you’re considering taking a loan, interest rates are quite high, so the returns will be wiped out.

You have put money away so that when an opportunity strikes, you will be in a position to take advantage of it, so Save! Save! Save! . If you cannot save Kshs. 2,000 ($24) per month, then you are unlikely to be able to Kshs. 20,000. Also consider:

– Joining a SACCO (Savings & Credit Society) if you don’t have the discipline to save.
– Have standing orders with your bank that automatically place money in savings accounts (which are not easily accessible).
– Resist the urge to spend on things you don’t immediately need.

3. Diversify your income: There is always something you can do outside of your job that could give you the extra money. You can read more on this here.

4. Use Professional advice: Many people think they can do everything without professional advice. Get a good lawyer, accountant, and financial advisor to before embarking on major steps. Just like you go to a doctor when you are sick, or a lawyer when you are making deals, also visit a financial advisor if you need to know how to invest.

5. Network: The big deals are made in small smoky bars. This means that you need to align yourself with the right people who know where the deals are. If this means joining your local rotary so that you can get the right introductions, do it. If it means doing more social work, do it. In short, the world is unfair to those who don’t know the rules of the game.

Derivatives in East Africa

On Monday, May 16, Strathmore University invited Eduardo Schwartz a UCLA Professor and world-renowned lecturer, advisor, expert and author to give a talk on derivatives.

Introducing the talk, Strathmore Director Jim McFie talked of the plan for Strathmore to be at the academic forefront for learning on derivatives in Kenya, which they are doing with the Global Board of Trade (GBOT) – and that for Kenya to compete with Mauritius as a financial centre, derivatives markets will have to be established in Kenya.

McFie also mentioned a tendency for Kenyan parents to push their children into pre-formed careers at an early age, which was wrong, as he noted that Prof. Schwartz trained and started working as an engineer before he branched into financial markets.

Prof. Schwartz was giving his first talk in Africa on the subject and chose to give a Derivatives 101 talk, even as he knew there were investment bankers, and officials from the Treasury and Nairobi Stock Exchange present. He observed that it would be difficult to set up such markets given the economic challenges here, but that ultimately, the development of efficient markets was necessary for economic development.

He noted:

  • You can have derivative on any variable that can be measured without discussion between the parties – e.g. rainfall, presidential elections, sports.
  • Popularity? Interest rate contracts are the biggest (390 trillion) followed by credit default swaps (which had rapid growth from 2006 ), then foreign exchange contracts, commodities and finally equity-linked contracts, in that order.
  • In any Wall Street Journal, you get a quick reading of all the major forwards e.g. quotes for the UK pound – 1, 3, and 6 months forward, and futures prices of metal & petroleum (gold, silver), agriculture (wheat, corn, orange, juice, pork bellies, rice) and interest rates.
  • Some arguments in favour of hedging: Companies can focus on their main business and take steps to minimize market risks such as interest rates, by hedging, which also minimizes the probability for financial distress.
  • Arguments against /dangers of hedging? Shareholders are well diversified and can make their own decisions, it may increase risk to hedge when competitors do not (Southwest Air), and it is possible to take large positions with very little money (traders can change from hedgers to speculators)
  • You can get more reading of a local perspective on derivatives here

While he was said he was shocked that there no forward market in foreign exchange in Kenya, there are forward markets for currencies, and for some commodities like flowers and fuel, which are done in private arrangements with partners, buyers, and customers, but mainly through large banks. They are not exchangeable, and there is no capital markets mechanism now for this.

The most memorable one was Kenya Airways fuel hedging which they have employed for a number of years during rising fuel prices, but which resulted in a loss of Kshs 5.6 billion (~72 million) in 2009 (more)

With time there could be a few more to deal with gaps such as the current situation where farmers are hoarding maize harvests to draw the government out into paying more for the crop.