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Investor's World

Investing– No Longer a Luxury!

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In the past, we used to see savings and investing as an afterthought. We spent what we earned and the leftover we saved or invested. Those more likely to invest were those with more disposable income or those who were spending less than they were earning. All you needed to do was to take care of yourself in the present and then the government will take care of you when you retired. Social intervention and family support schemes were very effective and readily available to help those who were struggling to make ends meet. Now everything has changed!

The situation has changed significantly to the point that government social interventions have virtually disappeared and the family network and support we used to enjoy has now been limited to the nuclear family. It is now “each for him or herself and God for us all”. To be able to meet your short to medium term goals and prepare adequately for retirement, investing should be taken up more seriously and not be relegated to what we do when we have surplus funds. It is important to understand some investing terminologies in order to appreciate why investing has become a very important component of our daily lives by juxtaposing it to the financial realities we face today and what needs to be done to improve the situation.

No talk of investment is complete without mentioning savings because that is the prelude to the whole idea of investing. You can only become a successful investor if you appreciate the concept of saving. Savings can simply be said to be consuming less in the present in order to consume more in future and its higher colleague– investing, to be the buying of assets like stocks, bonds, real estate with expectation that the assets will make money for you. Investing diligently will lead to a state of wealth creation where the individual has sufficient wealth to live without having to depend on income from employment. Created wealth become very important in retirement because the individual will no longer be earning an income.

Investing has seen a lot of modifications, changes that have been witnessed in the financial and social space. Due to inflation and a significant increase in the cost of living, investing has taken the forefront and commands so much attention that it has become an important tool for survival. Our financial realities look so grim that without the citizenry literally taking their investment future into their hands, there will be gnashing of teeth in future. For those who lose their teeth in old age, I bet teeth will be provided through investing.

The first financial reality we face today, is that our generation is not saving enough. We have become a generation used to instant gratification that it is very difficult to delay spending for later. Of the about 24 million Ghanaians, only 30% of us who save and of that number the amount saved is not adequate. The internet has played a significant role in making sure we satisfy our wants instantly. Those of us who try to drown out the advertisement noise are sadly not saving enough. When it comes to how much of salaries are saved, Ghana lags behind the likes of Kenya, Cameroun, Nigeria and Botswana.

Another financial reality facing us as a people is that we don’t have a clue about the cost of retirement and therefore it becomes very difficult to prepare for it. Retirement is so far into the future and therefore why bother now? Retirement has been termed the silent killer because at the time it hits the retiree, he or she will be helpless to do anything about the situation. It is very difficult to estimate the cost of healthcare because old age brings its own set of very expensive diseases. The number of dependents also increase because of the appearance of grandchildren and other family members, even though the children would have left the nest by then. Society also looks up to the old to shoulder some important responsibilities and our cultures also places a lot of weight on the older folks.

Directly tied to being clueless about the cost of retirement, is the lack of understanding about retirement entailment and how social changes will impact living standards of the retiree in future. In the past the system was structured in such a way that it took care of us from cradle to the grave by making sure social programs and family members were on hand to help those who fall by the side. Living expenses weren’t that high and therefore everyone got by one way or the other.

At some point in the not-too-distant past, it became apparent to governments that the take home pay wasn’t taking the retirees home and therefore the government of Ghana in 2008 decided to overhaul the nation’s pension framework. This brought about the new pension act, Act 766 of 2008, which made provision for a three-tier pension scheme where employee and employer contributions are categorized. Tier 1 and 2 are mandatory contributions from both the employer and employee. Tier 3 is reserved for private pensions and is available to both formal and informal employees with a very attractive tax advantage for contributors. What is very important about the new pension scheme is that the risk of providing for retirement income has shifted from the social security providers and is now borne by the employee with the added responsibility of making private investments to bridge the funding gap when the retirement income is inadequate.  

The need to take personal investing more seriously is reinforced by the fact that a worker can be forced into early retirement due to conditions that might be beyond the control of the individual such as ill-health and accidents and redundancies. The internet and the drive to automate most of the processes makes redundancies of employee a more likely proposition and the only individuals who will survive are those who were able to invest in the summer of their lives to take care of them during the cold days.

Global AgeWatch makes the case even more compelling for investing if you live in sub-Saharan Africa. Global AgeWatch provides an overview of the progress being made in realizing the right to health of older people around the world. Their report illustrates the deficit and shortfalls in the wellbeing of older people around the world. Their Global AgeWatch Index for 2015 assessed the quality of life of retirees globally and ranked countries according to how comfortable old people are in those countries. The criteria for the ranking included capabilities, enabling environment, health status and income security. All the countries in the sub region were placed in the red. This means that if you live in a sub-Saharan Africa more especially in the West African Sub region, then one needs to look at investing for pension and old age with all the seriousness it deserves, because left to the system alone most of us will have a very troubled retirement.

What needs to be done is fairly straight forward but let me introduce you to basic money management skills. One of these basic money management skills is budgeting, which has been proven to curb overspending if followed religiously. A budget will bring a lot of discipline into a person’s finances and will make it apparent where all the money that comes in go.

Next, is to develop a financial plan for the future which will capture your financial goals, your current assets and liabilities; the development of a plan to attain your financial goals and then the implementation and monitoring of the plan to make sure the goals are achieved. Unfortunately, most people do not have the skills to undertake financial planning on their own and will therefore need a professional guidance. Anyone willing to learn how to implement financial planning can do an internet search and get a few tutorials on how it is done. It will be a rewarding experience.

Also one need to get running shoes; period! The link between investing and exercising is not so obvious but exercising will pay off handsomely in future in the way of reduced health care cost, saved time to the doctor and a general feeling of wellbeing which money will not be able to buy when you need it most.

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Investor's World

The Menzgold Fever

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Investment scams have been with us since time immemorial and at every point in time there seems to be a scammer actively deceiving the unsuspecting general public. A lot of literature has been written on investment scams but at the end of the day investors still lose money in these so called investment schemes. I am tempted to describe the participants in these schemes as gamblers instead of investors, but I will let it pass. I am tempted not to use the word “investors” but I guess I will just let it pass until later in the piece. The reason investment scams will never go away is because we as humans cannot separate our greed from our needs.

A lot has been said and written about the Menzgold scam (yes! It is a scam: if it walks like a duck, quacks like a duck and looks like a duck then it is a …) but I would want to look at it from a purely risk-return point of view. A lot of clients of Menzgold will hate me for calling it a scam but I think we should move away from being all sensitive about it, it is a scam. Period. The company had us believe it was offering an investment product and a lot of us bought into it with our hard earned money. When the end of this Ponzi scheme comes there will be a lot of anger and people who lose money will blame everyone for the loss but themselves. The truth is, after the dust settles it will rinse and repeat and we will be back at the start when a new scheme pops up. When the DKM scam came to the fore I wrote that more of that will be brewing in future and that the same trick will be used to get a lot of unsuspecting investors.

What makes the Menzgold pitch so appealing is that the underlying investment here is gold and I don’t think it is lost on anyone how important gold is both in our traditional setting and on the global front.  As of now, no one knows the scale of the scam but from numbers that have been thrown out by the company’s clients, I think we are looking at something astronomical here.

 

The Fever

Since the Gold Fever of the eighteenth century in the United States, gold has played a very significant role in the affairs of men and was used as a store of value during the period of the gold standard. Most of the customers of Menzgold will not admit it but the mention of gold might have done it for most of them. I have heard clients say they were actually shown the gold bar that their money was buying and that they were informed it will be traded to generate returns for them. I have a question or two about this but I wouldn’t want to be distracted by the very obvious weaknesses in the scheme.

The fact that the Menzgold is a Ponzi scheme is difficult for the investors to swallow but unfortunately it checks all the boxes of a Ponzi scheme and Mr. Charles Ponzi himself will be proud of the people behind the company. What is different here is that it is gold we are talking about and because of the global market for gold it would have been very easy for the investors to verify how the price of gold was trending on the international market. Those who were making money from it will tell you there is nothing wrong with the business model and those not doing so were holding their breathe to see when it will collapse.

The government has been blamed and the regulators have had their fair share but these investors should have be guided by caveat emptor, let the buyer beware. I don’t want to hold brief for government or the regulators but I think the first group to be held responsible for the mess are the investors themselves. Claiming Menzgold clients are greedy at the point is a bit too harsh and will appear a bit insensitive given the emotional turmoil they are going through now with thought of losing their money. A case can be made for greed but let us spare these investors all the bashing and focus on what they really bought into.

 

Let the Buyer Beware

In all the talk about Menzgold, two key issues have not been dealt with in a manner that puts the blame where it really belongs. I will borrow the saving caveat emptor-let the buyer beware-to look at the issue more critically. The first issue is that nobody, especially the customers, understood the company’s business model. A company’s business model is the way it makes money and if you invest in a company without an idea about how it makes money then you don’t really care that much about your money. I have heard very ridiculous description of the company’s business model from investors of the company and it appeared none of them was really interested in how the returns will be generated to pay them their interest so far as the interest kept coming. If gold was that lucrative I think a lot of other smart entrepreneurs would have ventured into the area. The most interesting description of the company’s business model involved the buying of gold collectibles from a sister company and handing it over to Menzgold for trading to generate returns for the investor. Fortunately gold is an international commodity with price quoted by the minute and therefore any investor who wishes to check how their investments are doing can easily refer to gold prices reported by the major international media houses  or even look it up on the internet. For the company to be able to pay the kind of returns to customers, gold prices should be either volatile, trending upwards or downward at levels that have never been seen before. And we have seen a lot, especially with global crises and their impact on gold prices. If the business model of a company is complicated or lacks clarity and cannot be easily explained then you don’t have any business investing in that company.

 

It Goes Without Saying

The second issue has to do with risk and I will borrow what a journalist once said when there were issues with iphone products in the past. The journalist indicated there are two rules that govern statement it goes without saying.  The first rule is that you don’t verbalize it. In the case of Menzgold, virtually all their investors knew the interest rates offered on the investments were too high but none of them raised an issue with it. Who will raise an issue when their investment is giving them spectacular returns? According to the first rule of it goes without saying, you don’t verbalize and I must say most investors in Menzgold stayed true to the assertion. Finance and investment knowledge tells us that if the rewards offered are great then there must be something that is holding the other side of the bridge. The other side of the bridge is unfortunately the risk side and there has been very few cases in Ghana where risk has been underestimated so significantly than in the Menzgold case. This brings me to second rule of it goes without saying. The second rule is, whatever it was that went without saying, if that situation crystalizes you don’t apologize, blame anyone or try to hold anyone responsible for what had happened. Let me unpack this a bit.

Menzgold offered very high interest rates on their products and as the rule I mentioned above goes, nobody mentioned that high returns will go with high risk. When the risk for which the high returns were used as compensation manifested investors decided to break the second rule of it goes without saying by blaming everyone but themselves. The regulators were blamed together with the government but I think an understanding of the risk-return interplay would have saved a lot of these investors. If we, for the sake of argument, overlook the fact that there were regulatory lapses and Menzgold should have been brought to book way earlier than was done then we can look at the risk side of the situation. In that case I will say that the returns matched the risk inherent in the product and clients should have been concerned. Clients should have, I will be hated for this, known that there was nothing like free lunch because someone will eventually pay at the end of the day. Unfortunately they happened to be the people paying for the lunch they thought was free.

When you invest in a product that offers high return it simply means that there is high risk associated with it. If you are an investor and you do not understand this then you will always be disappointed. If a product is marketed to you as a high return low risk investment and you buy into it, then you have not been paying attention to the financial market and should therefore not be allowed to invest your own money because you are a danger to yourself.

Investments lose money sometimes but the problem arise when an investor is under the notion that they are making safe investments when in actual fact they are risking a lot. After listening to some of the investors of Menzgold I came to the realization that these are ordinary individuals with little or no financial knowledge, who decided to put all their life savings into an investment scheme they do not really understand and expected that their moneys will be safe. My Jamaican friends will say “yuh think money grow pun trees”. My humble appeal to the investors of Menzgold is, I know they will strangle me when they lay hands on me, to dust themselves off and accept the fact that they invested in a scheme that had more risk than they were made to believe. At least the experience will leave a permanent scar on them and anytime they look at those scars they will be reminded that return and risk are bedmates.

 

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