How to choose a good investment

Do you look at investment opportunities with the right lenses on?

Jane works at a well-known advertising company in Nairobi. She earns a decent income and lives in Kilimani. She has quite a disciplined approach to saving. The one area however that Jane splurges on is dining out. She enjoys exploring restaurants and the different types of food they offer. She would usually go to restaurants in similar upmarket areas as where she lives. Her savings have been invested in relatively low risk instruments to date such as fixed deposits, treasury bills and treasury bonds. She has however concluded that she needs to make her money work harder for her and consequently attended an Investment Course. Her take home from that was that she should pursue diversifying her money into property and private business.

There is an investment opportunity that has made its way to her desk. Peter started a restaurant three months ago in town. His restaurant serves good Kenyan style food and currently does three lunch cycles and a dinner cycle. Because of the volumes that his business is experiencing, Peter is raising money privately to invest in a new kitchen and equipment as well as be able to hire a manager to help him. This opportunity piqued Jane’s interest due to her love for food and that she really enjoys eating out. Despite only being open for three months, his financials and business plan look promising. She figures this is a good place as any to start and gets Peter to take her to the restaurant. The restaurant is nothing like what Jane had in mind. The ambience that she usually experiences where she goes is completely lacking. There has been no effort to decorate. The furniture is very basic (wooden benches) and she cannot imagine anyone sitting there for more than thirty minutes. The restaurant is situated in a very busy and noisy street. When she goes back to her office she cannot get the image of that restaurant out of her mind. Though initially she thought it was promising, what she experienced and saw when she went there was haunting her. She picks up her phone and gently tells Peter that she will not be investing in his business at this point in time.

Jane has made a fundamental mistake that many of us make when it comes to investment. She is looking at the investment opportunity through the eyes of her personal preferences. Lets look at Jane’s errors a bit further. You don’t have to be the consumer of the product to be the investor in the product. When Jane entered Peter’s restaurant and started internally criticising the location, ambience, furniture quality etc. she was looking at it through what she would like to experience. She put her emotions into a business decision. She failed to understand that though Peter had asked her to invest in his business, he was not asking her to be a client of his restaurant. That restaurant was catering very successfully to a specific target market, of which she was not a part off. If he changed the restaurant to reflect the qualities she wanted to see, he would loose his target market and the volumes/profitability he was experiencing. Because you like doing a certain activity does not mean you necessarily invest in it. Her personal love of food and eating out was not a reason in itself to look for investment in the restaurant business. Being a consumer of the product does not make you knowledgeable in the business of the product. She wrongly figured that since she frequents many restaurants she would know what would make a restaurant work or not work. It is clear that she misunderstood what would make Peter’s restaurant work. Just because she consumed food at restaurants does not make her an expert in the restaurant business.

As an investor Jane needed to step out of her consumer hat and put on the investor hat. She needed to firstly get to understand how a restaurant business works. Because she thought she knew she was not open to receiving new information and learning from Peter. She also needed to understand Peter’s target market and look at his restaurant through that. That is when she would realise Peter’s business is about volumes, (which he would not get from her target market) and anything he was establishing was to handle those volumes. The wooden benches that don’t encourage people to sit for long are for a reason – that is why he does three lunch cycles! In fact as an investor she should have been very worried if he told her he was spending a lot of money on expensive refurbishments. His target market might actually react to that negatively. He needed to be in a busy street to keep volumes going. The same way Jane looked at Peter’s business is the same way we look at many other investments. For example many people want to by “investment property” in the location that they would live in. And as they are waiting to afford that ideal property, opportunities for higher returns in other areas pass them by.

Many times the better investment turns out to be outside your personal consumption preferences. Enter into an investment because it makes sense from an investment point of view (returns) not a consumption or user point of view. Always ask yourself “Am I making a personal consumption choice or investment decision when evaluating an opportunity?”

Waceke runs a program on personal financial management. Find her at waceke@centonomy.com| twitter @centonomy

Hi. Thank you for your article on planning for school fees. It was very eye opening. My question is whether I can save for my school fees in shares as opposed to simply putting the money in a savings account. This way my money can grow. Please advise.

Thank you for your question. Shares should be considered a long- term investment. The nature of shares can be volatile i.e. the price in the short term can go up and down depending on what is happening with that particular company or the market in general. You cannot be guaranteed of a short-term return with shares. Because you need the school fess in the short -term say next term’s fees, you cannot afford to take that risk. I am pretty sure the school will not give you a discount because share prices fell. If this was long- term school fees saving say for college, you could afford to take the risk as you have time to recover from any volatility.

Waceke Nduati

Email your questions or comments to Waceke her at waceke@centonomy.com|

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