RULE #1 NEVER LOSE MONEY ….

Last week my favourite investor Warren Buffett’s bought battery maker Duracell only days after he took a multi-million dollar loss in selling his company’s interest in embattled UK retailer Tesco.

Buffett’s company Berkshire Hathaway will pay $4.7b to Proctor & Gamble (P&G) using shares it owns in the consumer products company, a transaction which already has activists labeling it a tax dodge. Because the capital gains in his P&G holding will be rolled into the Duracell purchase he will not suffer the maximum capital gains tax applicable.

You don’t get to be the third richest man in the world by accident.

Every time Buffett pulls one of these deals out of the hat a rehash of his illustrious career is dusted up and paraded online, and it never fails to make for interesting reading.

Business insider had an online article “17 facts about Warren Buffett and his wealth that will blow your mind”, which among other things pointed out that 99% of his $63.3b was made after his 50^th birthday. Never mind that up to that point he had been investing in shares for 39 years or ever since he was 11!

Buffett is a real live example of the power of compounding. Fondly referred to as “The sage of Omaha”, Buffett turned 84 at the end of August.

There other jaw dropping facts like that last here he made $37m a day or about $1.5m an hour or about $25,000 a second last year.

Never mind too that in his life time he has donated more than $20b or the entire GDP of Uganda.

The facts about his wealth are always interesting reads but what serves as an eye opener is the thinking that generated this huge cash pile – by the way his company holds $50b in cash.

"The article “Warren Buffett’s most brilliant insights about investing” should be considered essential reading for business students, businessmen and anyone who wants to put his money on the line in entrepreneurial endeavour...

There is no space to list them here so one is best advised to Google the said articles, but several are enduring gems.

·        

 Rule number one, Never lose money; Rule number two, see rule number one – Buffet has lost money, every investor does. But by following a time tested model, where he buys companies that undervalued compared to their intrinsic value means the odds are in his favour in most of his investments. If he employs this method and he loses money he knows there is nothing he could do about it. Stick with the percentages so as not to lose money.

·         To be a successful investor you only need to know two things, how to value a company and how to think about market prices – with age has come wisdom from Buffett. And wisdom has a way of simplifying things in his experience that is all you need to know to be a successful investor. And he should know.

·         If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes – he says his best holding period is for ever. He has worked out that a good company, with good economics will appreciate in value beyond your wildest imagination over the long term. Some of his holdings like in American Express, Coca Cola and GEICO date back to the 1970s.

·         I am a better investor because I am a businessman, and a better businessman because I am an investor. – Whereas he has huge stock holdings his company also owns numerous businesses dealing in as varied products as ceramic tiles, paint, insurance, chocolate makers, jewelry, private jet leasing and precision tools. He applies the same criteria in judging his companies as he does his stock and vice versa.

Buffett’s methods are an open book and given his long experience – he bought his first share in 1941, he should be a reference for all business people of ambition.

THE EXAMS ARE HERE, BUT WHAT’S THE POINT?

This is exam season. Not only the big ones -- primary, O- and A-level leaving exams but also the end-of-year exams for all the classes in between.

They follow the same format as some of us did and our parents before us. The exams consist of a test on a given subject, to be done within a certain period, with pen on paper. The major change that has come over the last two decades is that in Math and Science papers the students can use calculators.

There has been a bit of tweaking of the curriculum to make this or that subject compulsory, to add a subject here and there, but the essence of the exam, which is to test rote knowledge, has stayed largely unchanged.

That is a problem because our education system was designed for the industrial age. In the industrial age the work is regimented, monotonous and calls for little to no creativity.

It is unlikely that when our kids finally get out into the world they will be facing the challenges for which this education system was set up.

In the brave new world, which is forcing itself on us, while in depth knowledge will still remain essential what will set one person apart from the rest will be their ability to make connections between seemingly unrelated fields, to innovate.

In the world that is fast becoming obsolete, one can get away with left brain thinking, which is rule bound and linear as opposed to right brain thinking, which is more artistic, lateral, empathetic and narrative.

In the workplace of the future it will not be a question of either/or, but one will have to be both a right and left brain operator.

It is already happening.

One reason Israel is the most innovative country per capita in the world according to authors Dan Senor and Saul Singer’sr book “Start Up Nation”, is because of the breadth and width of experience the average Israeli goes through by the time they hit adulthood. From their living conditions to their experience in the army to the encouragement by the society and environment to explore new avenues of doing things to taking initiative while solving challenges in a group setting.

There was a period when the generalist was king. The urban gentlemen of the Victorian age who had a working knowledge of law, medicine and engineering and a healthy appreciation for the arts. The industrial age shoved them aside and encouraged specialists. But now more than ever when innovation is going to be the differentiator the generalists are making a comeback.

The question then is how do our school systems need to be adapting to meet the needs of the future? Especially because they are already falling behind the demands of the workplace.

In a 2008 interview Thomas Friedman, journalist and decipher of modern trends, suggested that the competition on the future is not going to between economies or even companies but between individuals and their imaginations. That, will individuals be able to achieve what they can conceive.

So the countries and institutions that will be able to nurture imagination and allow it to actualise will be the winners.

Out of necessity the role of the school has to change. In times when information was scarce the schools were the repositories of information but now with embarrassing abundance of information the school’s role changes to one of bringing meaning to all this information and more importantly helping kids learn how to navigate and filter the widely available information.

"Essentially instead of imparting knowledge or teaching, more emphasis will be placed on learning how to learn. Which makes sense because in a fast evolving world you can’t stop learning after you leave school. The cliché learning is a continuous process will come alive...

But even more critical is that students will have to make the connections between all the subjects. While previously you learnt English, Math and history as distinct disciplines now students will be required to make connections.

So A-level combinations like Physics, Luganda and Islamics or Literature, Chemistry and Art will stop being the subject of great laughter.

Depth of knowledge will still be essential and even critical, but the worker of tomorrow will be called upon to solve problems outside his comfort zone and their ability to find the information or collaborate better with those who do, will be the more important skill.

But the even more important ingredient for our children, in ensuring that they become successful adults in whatever they set out to do, will be good parenting.

Unfortunately schools now shoulder the burden of feeding, character formation and providing role models for our children as parents’ power to work to afford the increasing fees and demands.

 In fact a Gallup poll released recently showed that the more successful people in the workplace had a teacher to not only look up to, but who also believed in the kid as an individual.

In the era of universal education teachers are going to be less likely to pay individual attention to individual students, the workers of the future will be mediocre to lousy unless the parents retake their rightful roles.

TO BE OR NOT TO BE A COMPANY?

It’s the question we are all grappling with, should we or should we not form a company?

In a recent discussion among friends, landlords are fretting because Uganda Revenue Authority (URA) is moving in more aggressively to tax their rental incomes. The law has always been there but URA has not be able or willing to enforce it across the board – I suspect partly because there are many landlords in URA.

"But as the demand for locally generated revenues build up, look to the taxman to get more aggressive in going after every cent that is due to him...

Everybody should pay taxes (please reinstate graduated tax), but if we are to get ahead it would be wise to pay only those taxes due to ourselves.

One way of doing that is keeping verifiable records, so if there is a tax dispute you have a basis on which to stand, but more importantly we really should incorporate or do all our business under a company, even those hobby farms we have on Hoima road.

To illustrate.

Assuming there is a rental property which earns about sh10m annually in rent. But also the landlord has done some repairs and shoulders the security, garbage expenses and other expenses, which in total amount to three million shillings a year.

Mr Magezi -- Landlord

INCOME	EXPENSES
Rental income                                 10,000,000	Repairs, security etc                          3,000,000
10,000,000	3,000,000

Mr Magezi tax liability will be sh10,000,000 X 30% or about sh3,000,000. URA allows some expenses as tax deductible if you are trading as an individual, up to 20% . So let us say they will allow Mr Magezi sh600,000 deduction so his tax bill will be (sh10,000,000 – sh600,000)X30% = sh2,820,000.

[Since this article was published in the New Vision i have been corrected on my computation on taxes paid on properties ownd by an individual.

Tax computation of an Individual;

Gross Rental tax                          10,000,000
Less: 20% of (10,000,000)=       (2,000,000)
                                                      8,000,000
Less: Annual thresh hold            (2,820,000)
                                                      5,180,000

Tax rate @ 20%                          (1,036,000)
rental income net of tax                4,144,000

NB: The expenses the land lord incurs like repairs and maintenance, security etc. for an individual are assumed to be 20% of the gross rental income.
Annual thresh hold is provided for in the current Income Tax Act.

This may suggest that its advantageous to own property in individual names but other expenses a company is allowed include depreciation and finance costs that may still bring the tax liability down even further]

But if Magezi had incorporated his real estate business the situation changes quite dramatically.

Magezi & Sons Ltd – Landlord

INCOME	EXPENSES
Rental Income                                 10,000,000	Repairs, security etc                         3,000,000
10,000,000	3,000,000

To get the tax liability of the company Magezi & sons first they deduct the expenses so sh10,000,000 – sh3,000,000 = 7,000,000, which is profit. Then they tax the profit say 7,000,000 X 30% = sh2,100,000.

Of course the calculation has been oversimplified, but the principle remains that in taxing individual income they do not deduct expenses before they lay on the tax, while in a company they first deduct the expenses and tax the profit. Technically if you are making losses you pay no tax.

An expert near you can advise you, but incorporating sooner rather than later is in all our best interests.

For starters it formalises your operations. All incomes and expenses are documented to start with, which gives you a more accurate picture of the state of your business. If you were under any illusions that you were making money keeping records can disabuse you of the notion before you have thrown too much money down the hole.

"How many of us are subsidising our business from our salaries with no end in sight but if we knew better would close the business and look somewhere else?..

Secondly a formalised business is more likely to attract serious partners – clients, suppliers, investors and banks, than an informal one, making ones chances of survival and expansion much better.

The story is told of some serious monied investors coming to Uganda looking for opportunity. There first choice was to partner or buy out an existing business as a way to enter the market. When they looked around they found that the so-called market leader was such a shambolic operation, they could not even come up with a fair value for the business. Not only that, they realised they could come into the market from scratch and actually put the “market leader” out of business. And that’s what they did within 18 months they are the market leader and the previous local businessman’s enterprise is sliding down into collapse.

And finally. If you are not paying tax now when URA comes knocking they will attempt to recoup all the taxes you have been dodging. Now if your books are well kept you might be able to negotiate, but if not it will really be up to the discretion of the tax agents what you are liable for. Many a businessman has collapsed in trying to pay their tax arrears.

Incorporate your chicken coop, your vegetable patch, your make believe consultancy as soon as is possible, being informal is a luxury you cannot afford if your intention is to build your business into a sustainable going enterprise that will feed your family for generations to come.