This week American billionaire Warren Buffett paid out $34 billion or about four times the size of Uganda’s economy to buy a controlling stake in a railway company that ships the most coal around the US of any railway company.
This investment came from a man whose networth has taken a $10b hit during the global financial crisis. But don’t cry for Mr Buffett, at the end of September his wealth was still estimated at about $40b.
Only days before news of this mammoth purchase across the Atlantic, the Auditor General revealed that NSSF made a sh50b loss largely due to the value losses on its share portfolio.
Paper losses on the stock exchange are not unusual but what made me really worried for the NSSF was when current chairman Vincent Sekono told parliament, 'The stock exchange is a gamble…'
If I had any say in the affairs of NSSF I would make Warren Buffett essential reading for all management at the fund.
Buffett made 78 years this year and is the second richest man in the world. His wealth has been anchored by his success in investing on the stock exchange. He bought his first share at 11 and often jokes that he wonders why it took him so long to get started.
His investing philosophy has not fundamentally changed since his twenties.
Buffett invests in good companies, as measured by the extent of their competitive advantage in their respective fields and especially if they are selling at a discount to their underlying value.
This philosophy is also underpinned by his attitude to the stock exchange. The stock exchange Buffett says, is only useful to him in as far as it tells him when somebody is doing something stupid in the market, either they are overpaying in which case he may sell or they are selling at a discount in which he may buy shares of companies he likes.
Buffett like NSSF is a long term investor, he believes that if he buys a good company which for one reason or another, the market is underpricing, the good performance of the share will be reflected in the share price eventually.
In the interim he says, the share may lose value but as long as the underlying business remains sound he sees no reason to panic. In fact he argues that if it was a good business at $100 a share and is now selling at $50 that is all the reason to buy more.
Going by his success of the last half century therefore, the stock exchange is not a gamble Mr Sekono.
It is risky yes, (isn’t crossing the road too?) but it is not a gamble.
Buffett’s take on risk? “Risk comes from not knowing what you are doing.”
To illustrate, when I drive to work in the morning, I don’t think it is risky but if I was to give my one-year old son the keys to the car and send him off to the supermarket that would be risky.
I was doubly worried when parliament jumped into the fray and declared that the NSSF officials should be held accountable for the sh23b loss NSSF made in its purchase of Kenyan telecom company Safaricom shares last year.
Going by Warren Buffet’s criteria the question should be whether Safaricom has an enduring competitive advantage and whether it was bought at a price judged to be a discount when measured against projected future earnings.
It remains a mystery to me why NSSF is overseen by people – civil servants and MPs, who are not contributors to the Fund.
Were these two parties beneficiaries of the scheme it can be argued, they would be more prudent in their recruitment decisions and less rash to prescribe remedies that are detrimental to the fund’s return.
But that is debate for another day.
The bottom line is that NSSF can take useful lessons from Warren Buffett if only because he has been investing longer than the Fund has been existence and secondly, he has been spectacularly successful in the process as well.
And as they say, you cannot argue with success.
Published November 2009, New Vision