On most days I get into my car and drive somewhere. It may be to work, to the shops, to church, to see a friend or it may be to drop my son in school. I do try to ensure that my car has the best chance of getting me to where I want to go. I ensure that there is fuel in the tank. I also try to keep it clean and get it washed several times a week. Every so often at the petrol station I stay a few minutes longer, pop the hood and get the oil and water checked. When I do remember I also check the pressure on the tyres. I also get it serviced regularly. When I hear a strange sound, off to the mechanic it goes. However if you asked me if I could absolutely guarantee that this car will get me to work. My answer, despite my best efforts would be no. I do my best to make sure it does but I still cannot guarantee it will. Even harder is to guarantee that in the next five years it will still be on the road. This is because factors beyond my control could happen. Shocks could wear out, the tyre could get a puncture, some connection somewhere in the engine that I don’t quite understand could come out. As for being on the road in five years, my car could be stationery somewhere and another driver who I can’t control may hit the car and ruin it for life. I may one day get an extremely exhausted petrol attendant who puts diesel in the car instead of unleaded. Then the engine is gone. Who knows what can happen? But I still choose to drive. Knowing it’s not guaranteed but doing my best to ensure that my car has the best chances of staying on the road and keeping me and whoever is in the car safe. Let’s now say my car is an investment that I am selling. What if I told you that it would give you a guaranteed return? Well that would simply turn me into a liar. We’ve now seen that the very nature of the car and the environment it operates in cannot be guaranteed.
Too many investors are being cheated by this word “guarantee”. Too many people who sell investments or financial products are misusing this word. What if I had a tea farm, asked you to invest in it and told you I can guarantee you a thirty percent return over the next five years? Again, I would have lied. I use tea as an example, because of the many things that people are planting, seeking money from investors, and promising a guaranteed return. Yes, I may base my expectations on some researched assumptions. I may rightfully assume all things will remain as they are today. What I don’t have the right to do is to tell you the return is guaranteed. I cannot predict the demand and price of tea in the future. What I can do is outline why I believe it will give you a certain return. I cannot guarantee you on shares. The very nature of shares means prices will go up and down and there is no telling what dynamics will be in play the day you choose to sell. Your job is to make an informed decision on what share you choose to buy, the same way I make decisions about taking care of the car. I cannot guarantee you a return on property. There is a big myth that you can’t lose in property. There are many people who have lost money in property believing that. Ask someone who had to do a distressed sale or speculated on property prices going up because of a certain project in the area that never took off. There’s an article in todays paper about residents of a particular housing development complaining about the extra costs they’ve had to incur. With any investment, just like the car and in spite of what the salesman tells you, you do have to look at the environment in which that investment is operating. With all investments there is an element or risk. Zero risk, which guarantee implies, simply does not exist.
The word guarantee is also appealing because then we can continue being lazy. If performance of my car was guaranteed I would not service it, fuel it, keep tyres at the right pressure, or even clean it. When we are promised a guarantee on an investment, we never have to do the hard work of the research and understanding the fundamentals of what we have invested in and keeping up to date with the environment relating to that investment e.g. tea prices. We don’t have to go through the logic of why a certain investment works or doesn’t work. It’s easier to stay in the comfort zone of the perceived guarantee. Once you accept nothing is guaranteed it will force you to make sure you know why you are investing and monitor those factors. The same way I have to take care of my car. If you are buying shares in the tea farm understand what drives the tea market. If you are investing in shares, understand why that particular company is going to grow and why the share price would appreciate. If you are buying property as an investment why will that particular area continue to have high demand. I think occurrences in the banking sector have now made it critical to understand our own banks not just as where we have accounts but also as businesses. I would still bet on my car because to date it has never broken down on the road. In the same way there are investments that are tried and tested more than others but still don’t form basis for a guarantee. When you understand investing this way and expectations don’t materialise, you also don’t blame other people. For example the stockbroker really has nothing to do with your shares falling in value. Let’s accept that we will take risks when we invest money. We will win some and we will lose some. Even though guarantee does not exist, taking no financial risk still remains the biggest risk of all. Continue to drive the car.
Waceke Nduati-Omanga runs programs on Personal Finance Management and Entrepreneurship.