Making money on the stock exchange

My friend Jack (not real name) believes he has got it made. This year marks the fifth year in which he has owned shares on the stock exchange.

A fifth anniversary is as good a time as any to take stock of progress and as the year winds down he has been doing just that.

He bought his first stock in 2004 with the dfcu initial public offering. He has not added to that position since, but that initial commitment has more than tripled in value in the ensuing five years.

During the same period he has been involved in the initial public offerings of the New Vision, Kenya’s power generating company Kengen, Stanbic and more recently Safaricom, Kenya’s dominant telecommunications player.

He also bought into Kenya Airways and Equity Bank in the secondary market.

He has exited some positions while adding to his existing interests in other firms.After the initial toe-dipping he has grown increasingly bolder by the year.

Going over his figures he has more than doubled his investment and had he been more experienced to take advantage of the market turmoil of the last two years, he estimates he would have added a few more percentage points on his returns.

Jack was noticeably excited about what his records showed. He was excited because in five short years he has seen a hot market where every stock owner looks like an investment genius, a down market where no one wants anything to do with the bloody stock and a sideways market where shares just drift along neither earning or losing money.

Through it all he not only came out with his initial investment intact but even doubled it.

He was excited too because Jack, who will be 38 next year, believes that when retirement comes along for him in less than 20 years, he can safely retire to a life of comfort and ease.

Using his current portfolio as a base, Jack estimates that if he commits an additional one to five million shillings annually to the market for the next 17 years, assuming a compounded annual return of between 15 and 20%, he thinks he can retire with a share portfolio of between sh870m and sh1.6b .

Jack admits he still has a lot to learn. But he is learning from the best. He hangs on to every word that falls from American billionaire Warren Buffett’s lips and tries to mirror his investment style.

Buffett, the second richest man in the world, has as the foundation of his more than $40b networth a number of judiciously chosen shares bought off the stock exchange.

The 79 year old Buffettt’s well publicised investment style is hinged on buying companies with strong competitive advantage, selling at a significant discount to their estimated true value.

Jack’s story is an eye-opener for people who think because they do not earn CHOGMesque salaries, they cannot aspire to financial freedom or a wealthy future.

Jack is a middle level manager, which means he is in limbo between an entry level salary and an executive salary. He drives a second hand Japanese car. Has been married six years and the older of his two children is four.

He helped foot the fees of his recently graduated youngest brother at university. His parents are alive and well and therefore he has inherited no property. Nothing spectacular about his financial pedigree.

He admits that when he started socking money away into stocks, he was not driven by a bountiful vision of the future but just out of need to store his money in a place, he intuitively knew would grow his cash faster than in any bank.

He was introduced to Buffett well into his share investing adventure.

Jack’s ultimate dream is to own a 100-unit housing estate, which will finance the many travels he has lined up in his dreams and a life style where money is no object.

Barring any accidents he is convinced he is on the right track and 2010–the first year of the rest of his life, cannot come soon enough.