This post has been long over due. I recently had a talk with Mr. Isaac Njuguna of Zimele Asset Management, a local asset management company to discuss various matters pertaining to the local economy, capital markets and investing in Kenya. It was a really pleasure to meet him. He is a unique fellow, very statistical in his thinking as he often would punctuate his sentences with terms such as "mean reversion", "standard deviation" and "multi-collinearity", often to refer to every day issues. I left very impressed by his grasp of the economy and his intellectual honesty. I will just discuss some of the issues we discussed so that I can share them with a wider audience.

Low NSE Participation

As an investment manager I sought his opinion on the level of the NSE. Was it too high, or too low and what issues bedevilled the exchange in Kenya. He was of the opinion that albeit the index was low, there still wasn't enough participation. Often in the media we hear of demutualisation as the key to improving the exchange, dealing with rogue stock brokers as a way to increase investor confidence and other grand schemes. He was of a slightly different opinion. Mr. Njuguna quoted a study carried out by Financial Sector Deepening Kenya (FSD), in their FinAccess Review of 2009 that found out amongst other things, that the NSE was one of the least known financial institutions in the country. The reason then that there was such low investor participation was that the NSE had not marketed itself enough to warrant high investor participation. This then lead to what he thought were sometimes low valuations that discouraged local companies from listing.

Financial Media

Added to this was the fact that financial journalism he thought, was a big disappointment. Mr. Njuguna was of the opinion that business news on local television had a long way to go. It was more of a "PR... or marketing event than business news". I must say that I completely agree with him, very little business is discussed on news and in place of this all we are shown is fanfare and ribbon cutting. Allied to this, is the fact that the media houses do not seem to understand the news and their viewers. Financial reporting is way over the heads of the ordinary mwananchi. He will not understand terms such as the index, market capitalisation, bond turnover etc. The news people need to find a way of explaining market events in a manner that is useful to the lay man. He tied this in with the low participation of the NSE. One is lost for words when you realise that people would rather put their money in low yielding commercial bank saving accounts than invest in stocks, t-bills or treasury bonds.

After this, he introduced the concept of multi-collinearity where just as we have the x's relating to each other rather than relating to the y, in his example we have the professional community talking to each other rather than talking to the ordinary mwananchi so as to warrant his/her interest in the financial markets. Financial journalists according to him are also not well prepared to discuss key issues with our business leaders. Most of them have degrees in journalism and cannot hold their own and pin down interviewees that are misinforming the viewers.

Investing in Real Estate

His take on real estate investing in Kenya was very Grahamite in Nature. Ben Graham to many is considered as the father of value investing as a science. After many years of random speculation in the New York Stock Exchange, Ben Graham with his 1934 book Security Analysis brought a level of scientific thought into the field of investing. In a nutshell, Graham thinks that one should be guided by rationale and complete information before investing in Real Estate. This was the same view shared by Mr. Njuguna well as far as Zimele went. He was of the opinion that real estate in Kenya was plagued by asymmetric information and thus one was never sure as to what value one was getting. Since price is the most fundamental issue according to Ben Graham and Mr. Njuguna, then the information asymmetry really meant that one was never sure as to whether he was being ripped off or striking it gold. When you are investing other people's money as Mr. Njuguna is, you have a "fiduciary responsibility" to safeguard their interests. Investing in real estate was thus a gamble.

Better the goose that lays the golden egg

Mr. Njuguna further went with his analysis. Warren Buffett once mentioned when asked whether he would invest in gold as stocks had taken a battering, he answered by saying that "he would rather buy the goose that lays the golden egg". In reference to real estate, investing in real estate according to Mr. Njuguna does not "organically" provide growth. To add value to your property you must inject more money. In buying a business on the other hand, one buys into a system that organically generates value without the need for further investment. Thus the goose that is laying golden eggs. Warren Buffett quoted Coca-Cola when asked about buying gold, he mentioned that Coke have their own mechanisms through marketing and other operations to generate wealth for their shareholders without the need for extra capital from their shareholders.

Margin of Safety as the Central Concept of Investment

I then asked what had been on my mind throughout. I had decided to want to meet with Mr. Njuguna as I had read that he was a value investor. Due to my great admiration for the simplicity and yet superb success of true value investors such as Warren Buffett, Seth Klarman, Ben Graham and Irving Khan, I needed to know how value investing would work in Kenya. I then asked "how do you decide on whether an investment is good or bad?"

As was expected he immediately quoted Ben Graham author of Intelligent Investor. His notion was that one starts with the risk-free return that the market currently offers. This would be in the form of treasury bonds or bills in Kenya's case. After figuring out your holding period, you then look at the market for a good company that is well enough priced and whose earning ability is the same or better than the risk-free return currently on offer. Earnings power as described in "The Intelligent Investor" is calculated by taking the inverse of the P/E ratio and giving it as a percentage. Therefore a company/stock with a P/E of 11 has a return of 1/11 = 9%.

Now in Kenya, if an investor had a time period of 5 years, he would start with any bond that is maturing within 5 years. Currently there is a bond that is yielding 13.5% maturing in 2015 (FXD1/2007/8YR). This then is the risk free return, to get a stock that is worth investing rather than putting our money in the above bond, it would have to be selling at most at approximately 7.5 times earning i.e. a P/E of 7.5. There are very few noteworthy stocks that are selling so cheap. A lower P/E of maybe 6 would then offer a 3.16% margin of safety.


All in all, it was a very stimulating conversation. A man who understands his stuff and has the honesty to take things for what they are rather than what he wants them to be. In the world of finance especially in Kenya, we have witnessed a lot of self-serving individuals who lack integrity. From the little time I spent with Mr. Njuguna I am happy to say that he has heaps of honesty.