#360Mentor is a continuation of the #40DayMentor series. In this episode, Robert Kabushenga (RK) speaks to Kenneth Kitariko (KK) on How to Buy Shares.
RK: It’s nice to have you Ken. It’s good to have you. Ever since we had Wim and Anne talk about the IPO, many people have been asking questions. So it’s good to have you. Help us answer some of these questions.
KK: Thank you for having me here.
RK: There is a specific part of your past that I am interested in, at what point do you first get involved with financial services in your work?
RK: Well Robert, I have always been an Entrepreneur at heart but also a lawyer by training. I got involved in financial services through my work as a lawyer for an institution that was funded by the US Treasury in Kampala. It was called the Capital Markets Project (CMP). I was the general counsel. And essentially the capital markets project, it’s mandate was to go out and find companies that could list on the Uganda Securities Exchange and do all the due diligence for them; financial, legal or otherwise so that if they approached an advisory firm, they would not have to pay as much and would be in a better position to list. After the CMP, our first successful transaction, if I may put it that way, was Nile Bank. We got Nile Bank from a position where it was ready to list and at the time African Alliance was the advisor but two weeks before it listed, it was bought by Barclays Bank. I think you know the rest of the story.
KK: When we had that successful opportunity, I was offered an opportunity with African Alliance, that’s when I began my real journey with financial services.
RK: What position were you offered at African Alliance?
KK: Head of Securities
RK: And what were we doing in that position?
KK: I was heading the stock broking unit. The trading unit which then had a license with the securities exchange. So we sought out clients; institutional and retail to trade through African Alliance for a regulated fee. In addition, we also sought clients to list with a hope that we could get an advisory contract and bring them through the process. That was my initial contract.
RK: I would like to take you back Ken. First of all, most of the people here are not financially technical people. They are coming here for the first time and they may not understand these things well. Let’s go back and break down as head of securities, what was your role in stock broking? And what’s this all about?
KK: I am sure everybody reading this knows what a real estate broker is.
RK: Who is a real estate broker?
KK: They sell houses or find you a house to rent and you pay them a commission. Their job is to find you a house to buy or to rent.
That essence of a real estate broker is the same as that of a stock broker. The difference is that stock brokers are regulated. You are licensed by the capital markets authority and you are also a member of the Uganda Securities Exchange. Nobody can just pop out of the blue and start buying or selling shares on behalf of an investor, you have to be regulated.
RK: Let’s go very basic, what are shares?
KK: Shares are an asset. You own part of a company through an asset called a share. And this share has got a value. And it is seen by all brokers on the market on a daily basis. You will go to the market and see that Kabushenga and company are trading at 100 shillings. We try to put people who want to buy and those who want to sell at commission.
RK: Let me see that I understand you well. A share is the method by which you participate in the ownership of a company. And that you can either get that share either by being a promoter or by buying off the market once there is an already existing company.
KK: As a method, if someone has bought a share, you can bequeath the share to your children in case you pass away. The basic thing is that you have to buy a share.
RK: Let’s pause the issue of shares, first explain to us, what is a capital market?
KK: A capital market is a market where financial products are bought and sold. It’s where financial investment is carried out. Capital markets are quite wide. In Uganda they consist of pension schemes and also the ability for companies to borrow money through private and public means and also the ability for individuals to buy shares.
RK: Then, what is the Uganda Securities Exchange?
KK: Uganda Securities Exchange (USE) is the market where most of these products are bought and sold. The USE is a self regulating institution but is licensed by the capital markets authority.
RK: And what do people go there to buy and sell?
KK: They buy and sell shares of companies, bonds and treasury bills by government and private bonds. Companies come to the market to borrow money. The method through which they borrow money is that they issue a bond through the USE and that bond is bought by both institutions and individuals.
RK: Ken, if I have a loose UGX 100 M and I am looking for where to put it. I could put it in an apartment or a car. When I go to the securities exchange, what items of value can I find on the market that I can buy that in the future they give me money.
KK: You can’t actually go to the security exchange yourself. You have to go through a licensed broker.
RK: So it’s the broker who goes to buy on my behalf?
KK: Yes, that’s true.
RK: So what range of valuable products does he find there that gives me options that can be found on the securities exchange.
KK: One of them is shares. Currently we have 17 companies listed on the stock exchange. Some of them are cross listed from Kenya. And when I say cross listed, I mean that a company like Nation Media Group is listed on the stock exchange in Kenya provided some shares for the uganda security exchange for Ugandans to buy. We have local companies that are listed like umeme, Uganda Clays. As far as shares are concerned we have 17 options. If there is supply. Because you can go to the exchange and find that institutions or individuals are holding their shares and are not selling unless you bid at a higher price which entices them to sell a portion of their shares.
RK: Apart from shares, what else can a broker buy for me?
KK: You can partake of bonds. We currently have about five. A lot of them which were issued a while ago have matured. You can buy bonds. You can lend an institution money by buying bonds. You will find that listed on the securities exchange.
RK: I want to go back to the issue of shares. I decided I’m going to generate my wealth; thorough my labour, growing and selling coffee and bananas. But other people may have their money and want to participate differently, you call it passive income. Can you just explain that way of generating wealth and income?
KK: This option is to try and ease the generation of income for people who do not necessarily have the time and are not professionally astute to make investment decisions. This process allows you to invest for example in unit trusts which are provided by a number of companies also licensed by the Capital Markets Authority (CMA) and collectively the unit trust provides money through these products, shares with bonds will expose you and they will offer you returns and your money is there and they make the investment decision for you to create wealth. Your role is to rollover the interest you’e gained to the same unit trust but collectively it is easier for you not only to generate wealth for you but also for the institution because it is collecting money so it finds itself in a situation where It can enter a unit trust because it has a collection of some substantial investment.
RK: I would like us to go in depth on the question of unit trust especially for people who have modest income but would like to be part of a big trust. But I want to first go back to see that I understood the primary thing you explained.
In order to participate meaningfully in this business of shares and the security market, the first step is to admit that you don’t know and that you need help. And that the next step is that you get help by recruiting a broker. Is that correct?
RK: So when I am considering the broker to take, what should I look out for?
KK: First of all, on the capital markets website, you will find a list of brokers. Then you make a selection. The Uganda Securities Exchange website will provide historical data on brokers’ capabilities and I guess that will be a good starting point. The higher they are on that list means the higher they are able to buy larger amounts.
RK: And that they can be trusted in the advice they give you?
KK: Yes. However, they are required to tell you that the final investment decision is yours. They do not make the decision for you.
RK: This is what I picked out, Ken.
1. Accept that you don’t know
2. Go to the official websites and get the right information on brokers and buy on their advice. The rest is noise.
KK: Absolutely. It is better to get professional advice than to have informal discussions.
RK: Ken, many people in Uganda especially in the middle class have been saving through circles, and investment clubs. They have this shared method of putting together money. Are unit trusts of the same purpose? And why is it an interesting option?
KK: Investments are similar. SACCOS and Investment clubs will not be able to easily operate in this market. They usually buy land or lend to each other. However, if you are not aware of what is happening in the financial sector, you need to get a professional to make the investment decision for you. And the critical thing about unit trust is that the money that SACCOS and investment clubs have does not move to the institution’s balance sheet. It does not move to their book.
RK: Hold. Let’s go back a bit. What is unit trust as a method of participating in shareholding and generation of income? 2) How do I get into a unit trust?
KK: A unit trust is the same as a SACCO or an investment club except that the money that you have in a SACCO or Investment club is unitised into a unit as opposed to cash where they look at the balance of the club in the bank. Unit trusts are also licensed by the CMA. They are also on the website. If you go on the website, you get get access to them and their contacts. Once you engage with them, you get to how you can take part. Before you would have to fill in a form and all but now, it is all digitised now. You fill in a form online and tell the amount of money you invest and for how long and what kind of risk you like then they create a profile of you. Then you transfer funds to an account. And these funds are acknowledged. by making investment decisions.
The point I wanted to make is that those funds are separate from the company that is going to offer the service. In the worst case, if the company goes bust, the funds of the investors remain separate. And the investor then may find another unit trust provider to manage your investment for you. So the money is safe which is very critical.
RK: One of the worries for ordinary folks is that I want to put my money in ordinary shares. But the histories of the companies that are listed is unknown. What if the companies stop performing well and it looks like a black hole where you just throw money? The other one is that you put in your money but it will come back after 40 years. The question here is ; is investment in shares supposed to be risk free? How does this play out in form of returns. How does one manage their expectations?
KK: Well, shares like all other investments with the exception of treasury bills are not risk free and people have lost money. Everybody needs to know that it is an investment that has risk like any other investment that you put your money in. so you can invest in shares. But there is no guarantee that you will get your money back. Your shares will be there but they will have a value at some point and should you wish to get your money back, you have to action a sale to get your money back. There isn’t a guarantee and I am not saying that in a negative connotation. It is just a risk issue. You may get your money or not. And you may even get very good returns at that.
When companies provide shares on the market, many things go into the pricing of the company when it comes. You can buy shares of companies that are already listed or you can buy shares of a company that is intending to list.
With companies that are already listed, there is more information for you to go by to understand the direction of the company. The ability for you to generate wealth and get an income from your shares because the company has been listed for some time.
RK: And its performance has been traced and is known.
KK: With a company that is going to list, you don’t know anything about the company until they present the prospectus which is a document that tells the story of the company. And it tells we are going to offer these shares at this price. The key thing is for you to understand how they got to that pricing and whether their story makes sense and there’s an ability for you to grow with the company based on the objectives and story they are telling in their prospectus.
The next thing is, how are companies priced?
There are many elements. A company will come and state that it is selling shares for ugx 100. Of course, the key thing is knowing, why are they selling and where are they going? What is their management like? If it is Kabushenga and company, we have to look at the farm, does it have good soil, is he a good manager, does he have staff? What is the likelihood for this company to grow in the coming years? That is the prospectus.
The other element to look at is to compare the Kabushenga farm to the farms in Kenya, what are the comparables?
The other element is demand. Companies, even though they are private, the higher demand, the higher the valuation. The company will do its due diligence to find out if we went to the market, what would be the due worth? They go through a variety of institutions like NSSF, other fund managers and they say for example, you could be worth 150.
RK: And that sort of guarantees or transparency of uptake?
KK: It gives you a sense. If the company is coming to the market like MTN, the transaction initially happens on the primary market. A primary market is a market where you are not buying and selling amongst yourselves as investors but you are buying from the investors only. That is what is called a primary market and that is why the price is fixed because they come and submit their application as many as they can at a fixed price. So it’s the primary market because there are fixed prices and fixed numbers of shares.
Once that process ends, then you go to the secondary market where you and I can buy shares on a day to day basis. And we buy from each other as investors.
RK: I want to ask you about risk appetite. I think that a lot of people do not understand that, can you please break it down.
KK: This is really critical. Robert, you and I are on the 5th floor. And our risk appetite is starting to diminish. We are more in preservation because we will be retiring soon. We are becoming conservative. We want to make sure that we don’t put our investments in areas that are too risky. Your risky profile has a couple of elements. The key element is how old you are and what you are doing. If you are in your 20s and 30s, your risk profile is much higher because even if you lose money, you have the opportunity to make it again.
RK: And most likely at that age, you don’t have much money to risk anyway, so you can lose it.
KK: Yes. There are a number of factors. Some people will have mortgages. Others have their children starting out in school, and they have plans for them. they may be building.t hey have quite a number of things they are putting their money to. So depending on where you are in this spectrum will guide you in your risk profile.
So the older you are the more conservative, the younger you are the more risk you can take.
RK: Basically what you’re saying is that as an individual, you need to know the level of risk you are comfortable with. For instance, it might be that you and I on the 5th floor might be looking at treasury bills instead of going to a betting shop.
KK: And this is very critical because we must plan our lives. And as I said earlier, financial products are not risky free. So you must be able to understand, in your portfolio, how much of that can you put towards a certain investment or asset class. An asset class can be land, it can be shared. Like you said, there are some financial portfolios that are guaranteed life treasury bills. Depending on how much and how long you can lend the government, you can get your interest on a monthly, quarterly or annual basis. Your money will be intact because it is guaranteed by the government.
Comrade Otoa: what investment opportunities can people like a boda bodas, SACCOS and Investment Clubs go into? What can incentivize them to get to invest in?
KK: Treasury Bills because they are guaranteed. We really must and always try to advise institutions like these to get out of schemes where you can triple your money in two months or a day. Financial products are for the long term. They are not for speculators. Some like treasury bills are guaranteed, you may not be earning billions as you might want them but your interest is guaranteed. They are really the way to go.
However, that is not to say that they are the only ones, I have mentioned bonds. They are issued by companies through the security exchange. They are not a hundred per cent risk free but they offer slightly higher than what the government offers but because of the reputations of the companies and time periods that they are requesting this money for, they are normally pretty much guaranteed.
Shares, like I explained, go up and down. They are not for speculators. I will not suggest that someone who is getting into their portfolio whose portfolio is just growing necessarily goes into shares because the elements involved around shares are much more complicated. Not only to understand but also to manage and predict. You can invest in shares but you have got to grow your participation as time passes by and as you understand what you are doing. The worst thing that can happen is for people to have this herd mentality where once Kabushenga is listed, everyone goes to get those shares. It’s not a guarantee that the shares are going to skyrocket. The key thing is to get advice and understand the amount of money you can put in reasonably and any speculators would not invest their money in shares. It’s a long term approach.
I will give you an example. Many years ago, Safaricom listed on the Nairobi Stock Exchange at 5 shillings per share. Safaricom was oversubscribed. It means that the number of shares the number of shares they offered, the applications for them were triple. The shares were oversubscribed. After two months, the share went to 2.5 shillings. The share went below the offer price. And the market was in panic.
However, the story of safaricom and what it was doing, the voice, mpesa, data and so on no body could doubt. The market dynamics caused the share to drop. People lost money. people had borrowed money to buy shares. However, yesterday, Safaricom was trading at 43 shillings.
RK: So anybody who stayed the course has extremely great value.
KK: Extremely. You are able to make profit from a share when you sell at profit. When you sell your shares at beyond the price you bought. And also when the company makes profit, you also make profit. Today, safaricom shareholders have been earning well from it for the last decade.
David Ojambo: How quickly can I sell off shares after buying them?
KK: The prospectus usually has a response to that. For example, for MTN IPO, AFTER 3RD December 2021, once the company has listed, you can sell off your shares any minute thereafter as long as there is demand from other shareholders to buy.
Olivia: What exactly do unit trusts trade in?
KK: When you engage with unit trust providers, they will provide you with exposure to either treasury bills or shares or a combination of both but the decision is yours. The thing with unit trusts is that they tend to pay you more than unit trusts on your return.
Samuel: Are digital platforms like Xeno safe to use?
KK: Yes they are. They also provide unit trusts. They are licensed by the capital markets authority.
Onyango: What guides your investment?
KK: When I was younger, I would do 40- 60, but as you grow older that percentage starts ot shange. Currently, I am at 80-20.
RK: Me, I was risking 75% but now, the calculation is slightly different.
Mutungi: If I cannot afford a broker, does that mean I cannot participate in the share market?
KK: Like I explained earlier, there are two ways to participate, one, where you buy directly from the seller like MTN. Secondly, you can buy from the market. In both cases you have to go through a broker. But when you are buying directly from a primary market, there is no cost to you. You associate with a broker who then provides a depository account for exchange and based on that you are able to make your investment. And your shares are able to go to the electronic depository account.
The only institution that processes this for you are the brokers. But again, if you look at the MTN prospectus, there are new ways to do it. things are going digital. But still you will have to choose a broker. Even then, it will be a broker.
In a secondary market, you have to buy from a broker at a fee of 2.1% of whatever you are buying or selling. It is a regulated amount. No more. No less.
RK: Thank you Ken for taking off time to teach us.
KK: Thank you Robert. I encourage everyone to read the prospectus and to get professional advice. Be prudent, don’t invest your money in something you don’t understand. And even then, don’t invest all your money in one investment. Be guided by age and your risk appetite. Speculation and herd mentality are terrible.
RK: Have a good evening Ken.
KK: Thank you Robert, have a good evening too.