Building a Saving and Investment Culture

For the past six-years the Dar es Salaam Stock Exchange have been running an edutainment challenge dubbed DSE Scholar Investment Challenge whose objective is financial literacy i.e. educating and sensitizing the youth, especially those in universities, colleges and secondary school, about the necessity of savings for investment, in this case investing in listed securities and bonds.

This is in trying to avoid situations where the next generation will have to live in the situation of not having enough assets (i.e. share, bonds, property, cash, etc) to meet obligations which then create significant stress, leading to host of problems, such as depression and heart diseases.

As it is said in the book of Proverbs 21:20 – [There is] treasure to be desired and oil in the dwelling of the wise; but a foolish man spendeth it up. Also Proverbs 13:11 – Wealth [gotten] by vanity shall be diminished: but he that gathereth by labour shall increase.

Thus, educating oneself and pursuing the discipline of savings and investing for the future is where wisdom towards financial freedom begin. This applies to individuals, but a nation also needs to create the saving culture and the saving-investment identity. This is necessary for the national income, because the amount saved in an economy will be the amount that can be directly invested or intermediated for investment in new physical machinery, new infrastructure, new inventories and the like. It is true than in an open economy private saving plus governmental saving plus foreign investment domestically equates into physical investment. In other words, the flow of investment must be financed by some combination of private domestic saving, government saving (surplus), and foreign saving – it is good to enhance domestic private and government savings.

Going back to personal finance – from overspending and financial setbacks to incurring massive debt and simply just not making enough money, there are several huddles that one has to overcome. Therefore, cultivating the habit of savings is very important and can be helpful in many aspects of life. A good saver can set aside funds for business, is debt free and has already made a right as well as bold step towards financial freedom. A good saver can also reach certain goals that cannot be attained on the limited income that one gets.

In many cases, people and companies tend to save and invest if they trust the institutions that manage their money and the economy at large. Countries with a high savings rate withstand financial shocks and channel more funds towards critical sectors of their economies. However, building this resilience is steeped in a culture of saving and investment. We are told that less 20 per cent of Tanzanians have a bank account, and as it stands only about 1 per cent have an investment account at the stock exchange.

As I argue for an idea and a culture of saving for investment I also underscore the fact that ours is a developing nation pursuing a vision of becoming a middle income country within this next decade, that as it stands those among us with formal employment are few and with poorly paying jobs to meet the cost of living –individuals have minimal disposable income and less to save and invest. I understand all of that, but within such circumstances there is opportunity to save for investment, you see this is also largely of a cultural issue. We all know some of us whose circumstances are better and could save and invest than they already do, however without discipline and a propensity to spend than to save – it becomes difficult. This is a question of choice. As I said in previous articles, one need to assess his/her financial health to help in the understanding the direction is headed towards achieving financial freedom. In doing this one need to have a clear picture of income and expenses, then plan and be focused on setting aside a portion of your income for investing, don’t spend unwisely.

As for our collective greater good – what is being currently pursued by the government in strengthening property rights by way of land titling will go a long way in promoting greater saving and investment in the area of real estate, and beyond. Along with this, ongoing efforts by the government to improve the business environment and addressing infrastructure challenges especially in the areas of energy, transport and communication is another key aspect of what the state can do to incentive people within the society to save and invest in new projects. Embedded into the above is also the commendable act by the government to shift public expenditure and spend more on infrastructure projects than on wages, goods and services.

I know this can sometimes seem complicated and may require a good way of striking the balance, especially based on what I said earlier — better wages and well-paying jobs enable individuals’ savings for investment – but for our collective greater good, sometimes the principles of social contract enshrined onto Leviathan (or commonwealth) as argued by Thomas Hobbes (the philosopher) may have to come into play. After all, if the state can save and invest on our collective behalf, benefits could apply the same, as long as mechanisms and tools for distribution of the wealth created is equitable and efficient. But it all starts with the knowledge, commitment and focus.

Is it time to Invest in the DSE Listed Stocks?

An analysis of the underlying activities driving our equities and the fixed-income markets over the last couple of months presents reassuring outlooks for prospective investors at the Dar es Salaam Stock Exchange’s listed securities. It is a fact that the recent past has been depressing to some investors, but not the value-investors.
For a start, the DSE bourse is currently trading at attractive multiples on the back of significant sell in 2018 which saw, DSE indices and market capitalization for domestic listed companies decline by 6 percent. The cause for the decline may be many – depends on the perspective, in summary key ones are: (i) sell-off by foreign investors in preference of US dollar-based assets (equity, bonds, currency)– note that foreign investors contributes up to 80 percent of liquidity creation at the Exchange; (ii) the declining appetite and change of priority/preference from listed equity by domestic institutional investors – particularly pension funds; and (iii) the selloff pressure by retail investors due to increased social economic demands requiring liquidation of their investments and/or also preferences for other alternative asset classes. However, putting these factors aside –because the intent of this article is not to explain the decline in prices — now let us proceed to the issue.
The upside to this [experienced decline in prices and depressed values of listed equities], is that valuations are now ever so attractive, presenting excellent entry point for most stocks which were previously traded at a premium relative to their true intrinsic value. What I am almost arguing is for investors to do away with speculative motives and sentimental driven investment approach and consider the “value-investment” approach and strategy. For more on this read the writings by Warren Buffet and his mentor Benjamin Graham, or Buffet’s long-term investment partner Charlie Munger.
Why the proposal to invest now may be attractive? Because, macro-economic forecasts support the idea of value investment. According to forecasts by the Government, the Gross Domestic Growth in 2019 will be about 7 percent, the same growth rate as has been in the past two decades. This growth rate is one of the highest not only in Africa, but across the global. Furthermore, data on the forecast by various agencies indicates that this growth will be sustained/maintained in the medium term, with some potential for the upside.

This positivism in sentiments and the underlying fundamentals of economic activities should somehow be reflective in corporate entities forecasts and performances. Data indicates that lending to private sector and productive sectors of the economy is increasing, in the stock market there has been less profit warnings, but rather reported stronger earnings growth, on the back of more attractive macro data and background. These indicators once digested are supposed to reflect and drive activity on the bourse.

Data also indicates that industrialization drive is gaining traction, as it is for the infrastructure and public investment activities. Based on these, and other factors, there seem to be investment opportunity presented in the banking, manufacturing, agribusinesses, infrastructure and FMCG sectors. I therefore would imagine that there will be opportunities for relatively good returns for investors in these sectors counters of listed securities, i.e. for those investors with medium to long-term view in their investment approach.

Without going into specifics but looking into the price earnings and price book value valuation matrices to determine which listed counters presents the most viable investment option, there are several counters which presents attractive prospects for value-investors, while others are also good buys for dividend seekers. For instance, while the banking sector has an immense potential, on the fact that some banks are trading at the trailing Price Earnings Ratio of 5 times and Price Book Value of less 0.5 times. Overall value weighted average PE ratio for banks listed in the Nairobi bourse, trades at 7.32 times and a value weighted Book Value is 1.32 times compared to our value weighted average NBV of 1.17 times. The same can be said of other sectors.

Let me conclude by summarizing this case: in India and almost elsewhere, there was a push for socio-economic growth via economic liberalization and market-based approaches and the more use of capital markets in the early 1990s – but, despite this, few expected much from a small software company that struggled to list its shares in Mumbai Stock Exchange in February 1993. Despite its size and potential, during then India was an economic “small fish” and the technology sector was tiny and untested. Those who were brave and bought shares of Infosys Technologies did well if they held on to the shares to date. The company reported an operating profit for the year ended 31st March 2018 of over US$ 2.6 billion – on a turnover of more than US$ 10 billion. Shares were worth 4,000 times more than they had been 25-years earlier.

Our TBL and TCC shares are now worth 20 times more than they have been 20 years ago when they listed in the local Exchange, but those who benefit from these (and other such stories I previously shared in my articles) are those who doesn’t get pulled or pushed by momentary sentiments of the stock market.

Early Financial Planning and Execution for a Better Retirement

Our priorities, goals and needs change constantly as we journey through life. Lifestyle choices like cars and holidays occupy and dominate our thinking early on as we start our career, then as years go by imperatives such as renting, buying or building a house come along.
After that we have education for our children, health care for us and our families and all the things that goes with growing families and expanding responsibilities. All the while, we have to keep an eye of the possibility of a comfortable retirement with some form of “financial freedom”.
Juggling these competing financial needs, on a limited and finite income stretches most of us to the core. However, the part of the secret to succeed in these challenges lies in start early, making plans and sticking, as much possible, to those plans. Have you ever heard words such as “financial freedom”, “the freedom fund”, or “the Rule of Seven”? – where you are encouraged to make regular and sustainable savings in pursuing to create a fund which is made up of investments in income producing investments (i.e. dividend paying shares, income-earning cash (i.e. fixed deposits and treasury bills), bonds, real estate’s rental income, royalties, etc) whose ultimate objective is to enable you live a relatively similar life as the one you had when you were earning regular income from your day job during the active career years.
What I am saying is that, you should get into the good habit of saving, early in life. The earlier you start the better, because the small amounts you save – with a compounding effect – turns into large sums over time. When you are trying to accumulate wealth for future, the longer you have your money invested the more it will grow in value.
The other advantage in starting early is the mindset it helps create. You begin to see savings not as some sort of luxury but as an essential part of your overall financial plan and execution. Basically, savings should be an integral piece of your planning and seen as important as your rent, or loan repayments or, school fees. The best way to approach this is to have personal plans and create the budget to support implementation of those plans. If there won’t be conscious and deliberate efforts to ensure all these are put down on paper – then the follow through would also face challenges. Unfortunately, most of us, approach matters of income and spending via focusing on the short-term, the here and now, where we act as if what is here now is far important to what lies ahead of us not so long down the line.
Because of lack of plans or the habit of putting matters on hold until the last minutes, or according priority to matters that are not, we end up spending money on things that we do not even need or know about. In this context, getting the basics i.e. personal planning, budgeting and budgetary control is essential.
Earlier [above] I introduced the concept of compounding, in accounting and finance this is a key term, and this is how it works — let us assume that your savings are kept in the form of bank deposits with a fixed term and your return is interest earnings. In this case, there will be the effect of compounding interest – meaning that the interest you earn each period is added to your principal and re-invested, so that the balance doesn’t merely grow, it grows at an increasing rate. It is the basis of everything from a personal savings plan to the long term growth of the stock market. It also accounts for the effects of inflation, and the importance of paying down your debt. What it also means is that the earlier you start savings the better. Let us assume that you are now in your early 30s and started saving, your chances of getting enough funds, not only for retirement, but also for buying/building a house, taking children to good schools, etc are much higher relative to if you started savings at 40s where the struggle to achieve financial freedom will be far much higher. Now, personal and financial planning is key – setting out your goals, setting out the plan to achieve the said goals and prioritizing objectives for executions.
But before you proceed with any savings plans, you have to map out your action plan for getting there. In other words, you need to determine if you have the spare cash to make savings. Thus, you need to construct your personal balance sheet and cash flow statement that seek answers to some important questions to see where you financially stand. Only once you have paid off all your short-term debt and you have income left over should you consider saving.
So, first thing you need to consider, is to settle your finances and outstanding high interest debts. This is not a rule but a prudent advice because if you have debt that is costing you say 20 percent in interest per annum and your invested savings is growing at more than 20 percent per annum and you can liquidate your invested savings to repay the debt, you are then doing very well, but this is often difficult to achieve and thus it is advisable or rather recommendable for you to take a simple approach, which says invest your savings, do not borrow or get into debt to make a saving investments. Look at your current financial position, i.e., your personal balance sheet and cash flow statement to understand where you stand.
In any case, even if you are on your 40s or 50s, you still have 20 or 10 years before retirement, and there is still quite a lot that can be done. It is never too late to start, what is important is that you have to have a sensible savings and investment strategy, act on it and seek help from financial advisers, when needed.