Welcome to another week of financial learning. I hope and believe we are all well and staying safe under these abnormal COVID-19 conditions!
Today’s epistle will focus on ‘unreasonable’ investment returns which many so desperately chase and get disappointed in the long run.
For the benefit of new followers, I will go over some of the basic things one should consider when choosing to invest their hard-earned money in any financial instrument.
The four key indicators we need to critically assess before any investing decision are: safety, return, time-horizon, and convertibility.
The first component most of us focus our minds on when we want to make an investment decision is the ‘return on investment’ – and rightly so.
Return on your investment simply means how much extra income you earn on any money you invest.
In Ghana, there are varied areas that you can invest in – including the Capital market such as stocks and shares, bonds, etc.
We also have Money market investments, such as Treasury-bills, fixed deposits, commercial papers, etc.
Other areas one can also invest in beyond Capital and Money markets are real-time businesses and real-estate investments.
There are others not mentioned here, but the principle of investment remains the same in all situations.
We need to understand that all investments involve some degree of risk. Whichever option you choose, there has to be an understanding before you invest that you could lose some or all of your money.
The U.S Security and Exchange Commission – in an article titled ‘Financial Navigating in the Current Economy: Ten Things to Consider Before You Make Investing Decisions’ – intimated that: “The reward for taking on risk is the potential for a greater investment return. If you have a financial goal with a long time-horizon, you are likely to make more money by carefully investing in asset categories with greater risk, like stocks or bonds, rather than restricting your investments to assets with less risk, like cash equivalents.
On the other hand, investing solely in cash investments may be appropriate for short-term financial goals. The principal concern for individuals investing in cash equivalents is inflation risk, which is the risk that inflation will outpace and erode returns over time.”
I want to share an interesting story that encompasses the basic tenets of investment returns.
Kingsley Anyaa is the only child of his father, Mr. Daniel Anyaa – who is an international business tycoon dealing in the sales and marketing of oil products across the West African sub-region.
Mr. Anyaa has other subsidiary businesses across the country which rake in thousands in monthly revenue.
Due to his net wealth and connections, he was able to enrol Kingsley in the elite schools of Ghana, eventually sending him to Canada and Norway to further his education at the Masters and Ph.D. levels respectively.
Kingsley centred his studies on Financial Engineering and Derivatives. He returned to Ghana four years ago to take charge of his father’s business as Chief Operating Officer, while Mr. Anyaa continued to act as Managing Director and CEO.
Per their business operations, funds are accumulated in the main bank account with Obinim Bank for four months before being transferred to their business partners in Japan and Russia for extra stock – based on the effective stock re-order system they have in place.
This had been the mode of operation for a very long time at Obinim Bank.
When Kingsley took charge of the Operational mantle, he saw business and financial opportunity in the accumulation of these funds; and thus drew his father’s attention to the benefits of investing them in short-term banking instruments which would bring in some interest, no matter how small it may be, before they issued the transfers.
Mr. Anyaa was initially dragging his feet, but bought into his son’s knowledgeable counsel.
For the start, Kingsley invested GH¢5million out of their total funds of GH¢11million for 3 months at Obinim Bank. They were given an effective rate of 21%.
At the end of the cycle, they had earned GH¢262,000 as interest.
This came as a big surprise to Mr. Anyaa, who was taken off his seat by such a display of financial knowledge by his son.
He gave him the go-ahead to engage in future deals, as this brought in more profit and extra revenue.
This practice, therefore, became the order of the day.
After two years, Kingsley devised ways of enriching his pocket as he now wanted to own his private business and varieties of cars to show his class as the COO.
He approached some of his university mates and other businessmen to sell the invested amount with Obinim Bank as collateral for their short-term loans.
These businessmen went in for short-term loan facilities with some banks for periods ranging between 1 to 3 months.
For easy accessibility and approval of these facilities, banks explored the option of clients providing cash collateral in the form of investment for fast-processing of the loan.
Kingsley saw this as a big opportunity, as he knew these businesses had the potential to pay off the loans before expiration.
His business proposal was to charge a commission of between 20-30% for the period he gave out his father’s investment as collateral.
So, he started with this project with a couple of businessmen and it seemed to be working well – as they paid off their loans quickly for early release of the investment before the end-date of the loan.
Kingsley operated this side-business for one year until he met Asiedu Nketia, his long-lost friend from Senior High School, who was into wholesale importation of spare-parts from Korea.
He needed a one-month overdraft facility to pay suppliers, and was directed to Kingsley based on his track-record of helping other friends and businessmen.
Nketia needed an investment collateral cover of GH¢2million for his short-term overdraft facility of GH¢1.5million.
As usual, Kingsley went through his financial statement, explained the terms, and got the necessary paperwork to be done with Banku Dade Bank (Nketia’s Bank).
One month later, Kingsley got a call from Banku Dade Bank that Nketia was yet to clear the facility, and thus he had one week to ensure the overdraft facility was cleared or else they would be forced to recall the investment from Obinim Bank.
This got Kingsley scared and he started making calls to Nketia for answers.
It was during these calls that Kingsley was told Nketia had died two weeks before after battling with cancer for 2 years.
There was a fire on the mountain. As we say in Ghana, it ended in tears for Kingsley!
Do not focus all your efforts on the immediate promise of returns, or else it will also end in tears for you.
Wealth creation is a gradual process and not an event!
TD Canada Trust, illustrating the virtues of investing early in life, says that if you start investing US$100 a month at age 25 and increase your contributions as you age, you’ll end up a millionaire by the time you retire.
This analogy is also true in Ghana. Start investing in even the least-risky vehicles, like Treasury-bills, early with a meagre amount and you will become a millionaire at retirement provided you are consistent.
The key to investment growth is consistency and not instant high returns. Do not be deceived; the principle of wealth creation has not changed and will not change.
Think of the other components of an investment – such as its security, ability to convert back to cash, and the tenure of investment.
These are as equally as important as the margins or returns.
Another important way to lessen your risks in investing is to diversify your investments.
It’s commonsense: don’t put all your eggs in one basket.
By picking the right group of investments based on the aforementioned asset categories, you may be able to limit your losses and reduce the fluctuations of investment returns without sacrificing too much potential gain.
I will end this article with a popular Akan proverb, which says “Obanyansofoo yebu no be, yennka no asem”. This means the wise are spoken to in proverbs, not plain language. I wish everyone a wonderful and memorable week!