Last week it was reported that former speed demon Usain Bolt had lost much of his retirement nest egg – about $12m (Sh45b) when a company it was invested in went under. The company suffered internal fraud which accounted for among others Bolt’s money.
This is a retiree’s worst nightmare.
I don’t know the details but I can imagine how such a thing
came about. The little-known company Stocks & Securities Ltd probably
approached Bolt and his management team and promised returns above the industry
average if he invested with them.
They probably bad-mouthed established wealth managers who
were offering, say single digit returns annually as “conmen”, spending most of
the money on fattening their owners at the expense of their clients. They were
a company with a difference. Probably spending next to nothing on marketing with
the savings being enjoyed by the clients.
"Given the short career spans of athletes, they hit their peak earning potential before they are 30, one can understand the anxiety to seek the best returns for their money. Better established firms, with time tested records but lower returns, seem boring and worse, thieves, exploiters, neo colonialists …and any number of expletives that can turn a poor black kid’s head.
We hope Bolt recovers his money from the fraudsters. But for us mere mortals, there is a lesson
for us in how we seek to grow and keep our money.
Banks are borrowing businesses. They receive money from the
public and lend it back to the public with their margin added on. They rely on
volume to make money because the margins are a bit thin, Very boring.
Even more boring is their investment process. They first
keep cash, when that becomes surplus to requirements they invest in near cash
instruments – fix money with other banks, buy treasury bills and bonds and then
maybe build or buy a building. The last to show they are solid, to the gullible
public who see brick and mortar as an indication of being solid.
With most transactions becoming digital a lot of those bank
buildings do not pay their way, dead weight on their balance sheets. But that
is a story for another day.
"The point is we need to invest like banks.
Stay in cash and move up the asset classes, cautiously and systematically. But no! What do the rest of us do? We start by investing in the mortar and brick as soon as we have some cash coming in. We climb the tree from the top...
Real estate is used as a store of wealth. The wealthy make their
money in trading goods or services and then store it in real estate.
The logic is simple. Our initial investments need to be as
near to cash as possible to cater for our daily needs and emergencies, once this is covered, we move on to invest in more fixed assets, which by definition are hard to
dispose of quickly. They often have low cash-on-cash returns but can show
dramatic appreciations over time, which value is unlocked on sale. That’s the
sexy part.
The banks’ time-tested formula is important because when the
savers come to withdraw their monies the bank cannot turn them back with
explanations of how they are illiquid because they parked their money in real estate.
"Greenland Bank, which was shut down in 1999 learnt this lesson the hard way. They behaved like us, rushing to build themselves a fantastic headquarters, hotels and other illiquid assets. They made the cardinal sin of using short term liabilities to finance long term assets. This mismatch cost them. Of course there was the issue of being in bed with shady fellows, but again that is a story for another day.
Stanbic Bank, which is many times bigger in value now does not
own its own headquarters choosing to stick to their core business as a financial
mediator. The building I am sure, will come.
Many of us who are in employment can get away – for a while,
with this inversion of the wealth creation process, because any bumps in the
road will be papered over with our monthly pay check. But it would do us well
to keep this logic in mind even if we have a regular paycheck.
As Bolt’s experience has shown going for the best return is good but steady and consistent returns are better...
Good and consistent returns add up over the long term. Higher
returns suggest higher risks, which means that eventually the high risk will
come through and God help you!
