The Parable of Diversification

He that resteth upon gains certain shall hardly grow to great riches; and he that puts all upon adventure, doth oftentimes break and come to poverty: it is good therefore to guard adventures with certainties that may uphold losses. -Sir Francis Bacon

Diversification is a portfolio management strategy designed to hedge against risk by investing in different asset classes such as stocks, bonds, mutual funds, real estate and precious metals, which are negatively correlated i.e unlikely to move in the same direction. Because different classes of assets move up and down in value at different times, the goal of diversification is to reduce exposure to risk in any one asset class which allows for less volatility and more consistent performance under different economic conditions.
Systematic risk, the risk inherent in the market due to factors we can’t control can never be diversified. On the other hand, diversification eliminates the other kind of risk, unsystematic risk-the risk specific to an individual stock.
Granted that spreading your eggs limits both the upside and the downside potential; a diversified portfolio will however ensure a sustainable long term growth strategy and benefit investors over the long run over holding individual stocks.

It is not just enough to diversify; an investor must ensure that their portfolios are optimized by picking securities that have the highest projected rate of return for their given level of risk. This philosophy is derived from the modern portfolio theory that is widely in use today by money managers.

The parable of diversification.

In early 1975, a man called jack wins $200,000 in a lottery. He decides to invest his windfall conservatively because 1973 and 1974 were terrible bear markets, he opts for purchasing long term government bonds.

In 1979, interest rates skyrocket, and the value of his bonds plunges to $144,000. Well, he decides, I’m going to get out of the bond market and cut my losses. But what to do now? He remembers that gold was selling for $35 an ounce in 1972; today It’s almost at $800 an ounce. Moreover, he just heard someone on the radio predict that it will soar to $2,000 an ounce so he decides to buy 180 oz of gold with his $144,000.

Now the year is 1982, and gold has fallen to $300 an ounce. Jack sells his gold and has only $54,000 left of his lottery winnings, but this time he’s going to be smart. In the early 1980’s, he knows, the only investments that have performed well are oil & gas and real estate. As jack sees it, only one investment makes sense. He decides to buy a condo in Houston. He locates a $200,000 condo and puts $54,000 down and takes out a mortgage of 146,000.

The years pass and it’s 1987. He’s paid his mortgage down to $110,000 but Houston’s real estate prices have crashed and his condo is only worth $120,000. jack decides to cut his losses. He sells the condo for 120,000, pays off his $110,000 mortgage and moves out of Houston with his remaining $10,000.

It’s now 1995 and jack is living in Silicon Valley. Everyday, he hears stories of this thing called the internet. He decides to invest his remaining $10,000 in a mutual fund, the extremely aggressive all internet fund.

By early 2000, we find jack thinking early retirement-his mutual fund is up 50% just in the past month! Given very strong returns, his fund is now worth $80,000!! But then the dot com bubble bursts and his fund looses over 95% of its value in the next two years. Jack has just $4,000 left. But he keeps telling himself: all I need is one good investment”

The moral of jack’s story: diversify, diversify, diversify!

This is what would have happened if jack had diversified his winnings. If jack had invested in :

25% real estate
25% Gold*
25% small cap stock
25% long term bonds

For the period from 1975 to 2000, his portfolio would have been worth $3,245,524

*Gold index inception: May ,1985

Siasa mbaya, maisha mbaya!

I recieved this foward from a friend-The author is famed columnist and management consultant Sunny B. The article presents a rather clear illustration of the malefic political time-warp we are bound in, even without analyzing the ulterior motives which drive the rampant political horse trading that charactarizes the murky game of politics ultimately feeding on the gullible and oft venerable mwanainchi.

Let's have a history lesson for the youngsters this Sunday.

In the 1980s, Daniel arap Moi and Mwai Kibaki led the same government. In the 1990s and in 2002, they were on opposite sides, and vociferously so. In 2007, they are together again, praising each other's statesmanship. In the 1980s, Moi and Kibaki were leading the government that was routinely> locking up Raila Odinga. In the 1990s, Moi, Kibaki and Raila were all on different sides.

Before 2002, Raila was with Moi against Kibaki. In 2002, Raila was with Kibaki against Moi, endorsing him with his famous 'Tosha' cry against Moi's chosen successor, Uhuru Kenyatta. In 2005 Raila led the constitutional referendum vote against Kibaki, with Moi's support. In 2007, Raila is Kibaki's main challenger for the presidency. Moi is on Kibaki's side. In 2002, Uhuru Kenyatta was pitted against Kibaki and Raila. In 2005, he was with Raila but against Kibaki.

In 2007 he has left Raila and looks set to join the Kibaki camp. In the 1990s, Kalonzo Musyoka was firmly with Moi and Uhuru, fighting Raila and Kibaki. In 2002, he was with Raila and Kibaki, fighting Moi and Uhuru. In 2005, he was with Moi, Raila, and Uhuru, fighting Kibaki. In 2007, he appears to be fighting Raila, Kibaki, Uhuru and Moi. In the 1990s, Musalia Mudavadi was firmly with Moi, Kalonzo and Uhuru, fighting Raila and Kibaki. In 2002 he was with Moi and Uhuru against Raila, Kalonzo and Kibaki. In 2005 he was with Raila, Kalonzo, Uhuru and Moi, fighting Kibaki. In 2007, he is with Raila, fighting Kalonzo, Kibaki, Uhuru and Moi. Do I need to carry on? You get the picture, young ones.

This is the matatu race called Kenyan politics. Every so often, a few leaders climb aboard a matatu together and paint it in bright colours. They join other equally loud> and garish matatus in a race around a circular race track. The music begins. After some time, the matatus come back round. Race viewers now note that some leaders have jumped to a different matatu with different fellow passengers. Nevertheless, they are waving at you with great gusto, and you are waving back. Why should they be doing this? There is one reason, and one reason only. There is no principle at work here. The only thing driving every one of these people is the need to take power. Why do you pull other people onto the matatu with you? Only because they can help you win the race. If they can't, you push them off, or jump onto another matatu yourself. When you are thrown off, you run alongside, throwing stones until you get tired. Then you sit down and wait. Another matatu will be along soon.

I wrote last year: 'Our parties cannot even be called institutions in any sense. They have no structures, no procedures that anyone respects, no elections that they bother to hold, and no vibrant membership that puts any pressure on them. They are matatus, decrepit vehicles that carry the ambitions of a few bigwigs whilst not caring two hoots for legality..The people on the party political matatu do not own it and do not care for it. They do not invest money in it, and they do not maintain it. They have no idea whether its engine is sound, or if the electricals are working.

They couldn't care less. It's a mere vehicle, a quick ride to riches.' If ordinary human beings behaved like this, we would consider them fickle and lacking in character. Do you make friends, drop them, befriend them, dump them when it suits you? If you did that, you would get no respect at all from society. When politicians do it, we say 'that's politics' and> accept it as normal behaviour. It's time we set our standards higher. It's time we began judging politicians by their strength of character and adherence to principle. Who has said the same thing, had the same allies, stood on the same platform and upheld the same agenda? The development race, which is not the same as the political race, is not won by loud people in loud matatus. It is won by preparing sleek and sturdy vehicles that are kept well-oiled and are maintained by the same people.

Different race-cars may take the lead at different times; but all are serious contenders and are in for the long race, not the individual lap. We can't do much about the quality of our contenders, but we can do something about the way we judge and reward them.

Stop applauding when a matatu is resprayed and appears with different passengers. Stop laughing when you see a collision in the race. Take your eyes off the political free-for-all run on the cow-field. Focus instead on the race that will take the country to second- and first-world status. The race that improves our education, our health, our livelihoods and our knowledge base is the only one worth cheering. Everything else is an irrelevant side-show. The sooner we realise it, the better.

Don't rejoice just yet....

The Feds decision yesterday to slash the funds rate to 4.75% from 5.25% was applauded by many and buoyed the indices sending the Dow up 336 points!
The funds rate is the rate at which depositary institutions lend money to each other and oft used to control the available supply of funds thus influencing interest rates on both commercial and consumer loans.

That the decision by the FOMC was anonymous tells us that they finally realized making a preemptive move to forestall a recession was much smarter than waiting for the worst then using a series of financial fibulators thereafter in an eleventh hour attempt to jolt back the economy to life. What difference a month can make, during their last meet, economic weakness took a back seat to inflationary pressures which they still have to deal with now that they have loosened up the supply of money.

I expected 25 basis points and a statement littered with fed jargon that leaves room for more cuts in future meetings based on careful introspection of the now manifest hazards borne from careless lending standards whose effects we are reeling.

In cutting the all important rate, the Fed choose to deal with the larger evil, thwarting a recession that was caused by lenders with loose credit standards who primed their balance sheets by charging high rates and packaging exotic mortgages to the hoi polloi borrowers who were plagued with poor credit and otherwise afford homes. In my opine, it is not the job of the central bank to bail out speculators and greedy banks but rather maintain sound fiscal and monetary policies with an aim of ensuring growth while balancing inflation.

I guess since the credit mess was going to trickle down and start nibbling away at the economy, especially since consumerism is the key driver for growth-Well, when people are at risk of or loose their homes, they can no longer use them as ATM’s or feel comfy about future prospects, budgets are ultimately tightened and that lack of spending will eventually hit most sectors of the economy hard thus slowing growth rates and earnings. Alarm!

In the short term the rate cut will help the hoi pollioi, who took out ARM's, breath easy because payments will adjust downwards in tandem with the interest. in the long run, housing still remains weak. Individual home builders say it’s too soon to know when conditions will begin to pick up again. On Tuesday, the NAHB reported that its index of builder confidence fell in September to the lowest level on record! At an investor conference on Tuesday, Robert Toll, Chairman of Toll brothers (TOL) said its too early to call a bottom just because of the rate cut. Ultimately, the governors have provided a much needed psycological boost for consumers and investors but housing fundamentals still remain weak.

So giddy up Uncle Ben, but be careful of the “moral hazard”. This is a condition economists attribute to chopping away at the rates too quickly which would lead to a re-pricing of risk and consequently incubate favorable conditions that led to this credit squeeze.

To our own, Manu Chandaria. Businessman & Philanthropist extraordinaire

Don't ask me how I knew who Manu Chandaria was when i was just 10 but i just did. His family has been involved in various forms of trade ever since Sir Micheal Macdonald, Kenya's white governor bestrode our lands like a collossus and when Johnstone Kamau wa Ngengi was a little known Kikuyu activist.

His name commands attention and utmost respect in business circles not only in Kenya but in all the 40+ countries where his company, Comcraft has a business prescence. The Comcraft Group is a $2.5 billion conglomerate that was founded in 1929 and now boasts over 200 companies that stretch across all the 5 continents. In Kenya, it includes Mabati Rolling Mills Ltd, Galsheet Kenya Ltd, Booth Manufacturing Africa Ltd, Eslon Plastics of Kenya Ltd and Kaluworks Ltd among others. In Uganda, it has Uganda Baati Ltd, while in Tanzania, these are Aluminium Africa Ltd, Metal Products Ltd and Tanzania Chesemen Ltd. Chandaria has been thrice voted East Africa's most respected chief executive, an honor he downplays.

Withought a shadow of a doubt, most Asian businessmen in Kenya who run mega enterprises have achieved their gargantuan wealth through unsrupulous deals crafted in association with exceedingly corrupt power barons and members of the political elite who have fleeced treasury coffers with impunity for decades. Think Naushad Merali, an accountand with Ryce motors in 1984 who rose to dizzing heights of success in a relatively short time frame and now sits at the helm of The Sameer Group of Companies which has a heavy prescence in every sector of the economy, construction, agriculture, finance, IT, transport, communications etc...you name it and Meralli is there. People like Ketan Somaia, Kamlesh Pattni, The Kamanis and many others whose names were synonymous with underhand ventures that evolved into monstrous scandals involving shady contracts were billions of dollars went up in smoke only for the said individuals and their collaborators to walk away scott free and enjoy the spoils of their ill gotten loot publicly!

Not Dr Chandaria. He has never been remotely associated with any dubious deals nor have his businesses benefitted the economic mileage that political patronage bestows. Here's a man whos wealth dwarfs the Ndegwas and Kenyattas, eschews publicity, has been honored worldwide for his contributions to commerce and charity work and hobnobs with world leaders; a true enigma.

Said he, " Back in the 1950s we heard about the Rockefeller and Ford Foundations and what they were doing in America. When my brother and I came back from America we thought of starting The Chandaria Foundation. This was in 1954. "The idea was to help people without waiting for them to approach the Chandaria family. "We thought that with a foundation there would be a focus on our giving and over the years this has proved true,"

Today, the cause of his charity work has been geared towards the disabled, children and the sick. It is said to whom much as been given, much will be demanded. Chandaria, through his deeds has truly embodified compassion and selflessness by making a difference in the lives of the less unfortunate.

Only in America is the culture of giving back ingrained among the creme de la creme. Both corporations and individuals. It was just the other day another hero of mine, super investor, the oracle of Omaha Warren Buffett was announcing his $31 billion dollar pledge to the Bill & Melinda Gates foundation. Going back in history, like Chandaria alluded to, You will find that nearly all fabulously wealthy American families going back to the robber barrons donated large sums of their monies to charity and set up foundations that advance human achevment, fight poverty and injustice and promote social respondibility.

This is in sharp contrast to Kenya where magnificent wealth achieved through sheer plunder of public institutions and through political connections is repatriated to foreign countries with very little of it trickling back to the economy and worse yet, none of it is given back to society except in small sums through political harambees and counterfeit public displays of sympathy.
Always dream and you will be-I aspire to be like Chandaria someday. Not in the monetary sense because my parents never started any business that I could take over and grow into a billion dollar corporation but more so in the humane aspect. The world is filled with abundance through right application of thought and effort I will have my share of it and hope to use that blessing to help the downtrodden and be remembered not for my fortune but for what I did with it.