You don’t have to get a side hustle or two for you to start earning passive income. Investing in financial markets is another option. Paul Mwai, CEO of AIB-AXYS Africa had a wealth of knowledge for us on the subject in this interview.
Whenever you research ways to start earning passive income, you’ll mostly get advice about starting another business or a job on the side to supplement your primary income source. Naturally, I believe this is why most people drift towards that direction. However, this might not be feasible for most people due to time and financial constraints (doesn’t mean it’s not doable though).
So now you’re probably asking yourself, “What other options are there?” Well, have you looked into investing in financial markets? According to Paul Mwai, CEO of AIB-AXYS Africa, it is not as difficult as you think it is. Sometimes the investment and trading jargon might throw you off, but all you need is a bit of research and expert advice to get started. Fortunately, Paul had more than enough insight for us on earning a passive income by investing in financial markets. Enjoy!
Tell us about AIB and how your career journey led you there.
I am the CEO of AIB-AXYS Africa, which is one of the leading stockbrokers on the Nairobi Securities Exchange and the result of a merger between two companies (AIB and AXYS). We are now the top derivatives trader in the market and one of the leading stockbrokers on the Nairobi Securities Exchange. We do bond trading where we’re ranked 3rd or 4th in terms of trading shares on the Stock Exchange about 5th in trading on the Bonds Market. AIB-AXYS is also one of the top providers of online trading solutions through our DigiTrader App, which a lot of young people are now using to access the stock market online without having to come in and fill out forms. It’s all automated.
As for my career, I went to University in Australia where I studied Banking and Finance with a heavy bias towards capital markets. I came back to Kenya in 1991 and joined Barclays in August 1992 after a long job search. I worked there until Barclays was then sold to Old Mutual in 2002 and as part of the sale, the staff also moved over to Old Mutual. I worked there for another 6 years and was approached by African Alliance to head up the fund management side of the company. That was my first appointment as CEO of African Alliance Asset Management Company.
In 2012, AIB approached me to join them as CEO and I’ve been there since. So that’s my career journey, which I’ve thoroughly enjoyed despite the ups and downs.
What does wealth mean to you?
I think it’s what you save and invest and it grows. If, for example, you lost your job today, what would you have? If you’re earning a salary of say KES 100,000 and you’re spending all of it, then you’re not wealthy, even if you’re driving a Mercedes-Benz (laughs). Your wealth comes from what you put aside, invest, and accumulate over the years so that you at least have an estate.
Read also: Can you create wealth from a paycheck?
From your experience in finance investment and helping people create wealth by earning passive income over the years, what would you say is the best part of the job?
The best part of the job is when you advise people and you see them making money for themselves and building wealth. When the decisions you make result in real wealth creation for your clients and you make the right calls to clients, that is the best part of the job. If for example a client comes to me and says they have a million shillings they want to invest, then I’ll advise them on the steps to take and give recommendations. The most enjoyable part is when you see them growing, creating wealth and continuing to prosper by applying those recommendations.
So are there times when you’ve advised clients on their investments and things didn’t go as planned for them?
Yes, there are and for different reasons. For example, the stock market always has its ups and downs. So it could be that the client came to you and you advised them to buy specific shares and then the shares went down. Typically what would happen is maybe they had a very short horizon. With the stock market, you need to have a long-term horizon to allow for the ups and downs.
Sometimes you can advise them and they’ll set a long-term horizon but when things start going down, they panic and want to sell and get out. Ultimately, they might end up getting out at the bottom with a loss and saying the stock market is not a good place to invest. The reality is if you understand the risks of the stock market and are able to manage those risks effectively, the stock market is actually a very good place to invest.
What was your first investment, and what lessons did you get from that experience?
My first investment was a company that was listed on the stock exchange, which used to be the owner of Africa Online - one of the first internet providers in 1998. It was listed in London and had a secondary listing in the Nairobi Securities Exchange. I noticed that the price they were listing in London was significantly higher than the price they were listing the Initial Public Offering (IPO) at, so I saw an opportunity for an arbitrage dump.
The lesson I got from that experience was that even though the market is always volatile, it also offers opportunities which you need to take advantage of when the price is lower. You should always be on the lookout for where you can invest your money in the stock market.
What are some financial mistakes you’ve made that had you wishing you could go back to the drawing board?
Well, the first mistake I made was to start investing too late. (laughs)
When I got my first real job at 25, my priorities were completely on the wrong spectrum for 8 years because I needed to buy furniture, a car, etc. (laughs). I actually started my investment journey when I settled down with a family. So in hindsight, if I had started earlier, those 8 years would have been fantastic for building my wealth.
The other mistake I’ve made several times is getting a little preoccupied with a share that's doing well and missing an opportunity to sell it into strength in the market. Also, holding on to the share for too long even after it showed profitability. Sometimes when something is doing well, you're tempted to think it will go on forever - this will not always be the case.
Where do you think people get it wrong when it comes to creating wealth with passive income?
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Firstly, by getting the wrong investment horizon whereby you are investing in a long-term asset with short-term objectives. For example, investing in the stock market with your children’s school fees that’s due in six months to a year’s time. That is risky because there is a possibility the market will come down. The passive income you should put in the stock market is that which you want to save long term. Put the income you want to save short-term in a money market fund, which you can redeem quite easily without the loss of value.
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Another mistake is over-concentration on one or two investments. The idea is always to diversify your portfolio because one investment might go down and another might go up but overall you’ll still remain relatively on a positive point. You should actually build a diversified portfolio with different categories, such as stocks, bonds, some property, and any other available investments to achieve that. This is because each investment behaves differently at different points.
When you’re younger, you should take high-risk, long-term, growth-related investments so your portfolio gives you growth. Property and the stock market will give you growth over the long term. As you get older, you change from growth to income so you’ll now take income-generating, low-risk Investments. Because eventually, you’re going to depend on those investments to support your livelihood. Now you can change to bonds, which will be giving you interest to use for your daily needs in the event that you’re now retired or your job is no longer there. -
The other mistake that people make is to get too attached to one share without doing the fundamental analysis and instead relying on, “street talk.” An example of this is when you quickly buy a share just because you heard someone say it was going to do well. Ideally, you should get expert advice on any investment you make. This way, you’ll be guided by somebody who can look at things objectively because your perspective will always be clouded by the emotional aspect. For example, if a share has made you money in the past, you’ll be biased towards that expectation and might not actually look at it objectively.
What advice would you give to anyone thinking of venturing into financial investments?
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Start early and make a commitment in terms of a standing order to whatever investment you make. They say that you should save first and spend second. So if you’re earning a salary, you should start by saving and then spending what is left and not the other way around. Once you put a standing order, you almost forget that you have it, and then you’ll look at it six years later and realize you’ve got so much money.
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Number two is to do your research, talk to investment advisors, talk to people, read articles and get knowledge about investments and the characteristics of various investments so you have the right ones for your portfolio.
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Number three, have a clear objective as to why you’re saving and don’t just save with no end goal in mind. You could save for your children’s education, a new car, school fees, retirement, or even buy a company in the future. Having a purpose for your investments will guide the decisions you make and keep you on the journey. Time is an important element of investments, that's why you need to start early. The effect of compounding that money over the years is fundamentally what makes the biggest difference. If you make the right investment decisions and keep reinvesting what you get to earn a good return annually, the level of growth from that investment will be incredible.
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You also need to manage your portfolio in such a way that when the price comes down, what you’re actually doing is pound-cost averaging. So you’re buying lower and increasing your portfolio. When the prices go up, that’s the time to sell because you should be selling into strength in the market.
Is it ever too late to start investing in life?
There’s no investing too late in life. You can invest any time. However, the portfolio you would invest in when you're 60 will be different from the one you would invest in when you’re 20 or 30. So your portfolio structure is what will change.
If you were to recommend a starting point for any newbie investors, what would that be?
For a newbie investor, I think the stock market is one good place to start, particularly, if you’re young. The requirements are very low, you can go online, download the AIB DigiTrader App and open an account then start putting money into that.
Number two, you can do unit trusts, or you can do a money market fund, a bond fund, an equity fund or even a balanced fund. Then make that commitment to regularly re-invest with whatever interest that is coming to you.
You can also invest in the bond market, which has a slightly higher capital requirement and requires you to open an account with the Central Bank, but also gives very good returns.
Lastly, what are some good investment books you would recommend for our readers to dig into?
I would recommend Rich Dad, Poor Dad for most people as a good starting point in terms of your wealth creation journey. It explains the difference between investment as an asset and as a liability while creating an understanding that you’re building wealth to substitute your income.
Investors like Warren Buffett and Charlie Munger, who are business partners and have done a lot of investing together, have a wealth of knowledge on what goes on in the investment world.
Ray Dalio has also written a number of books such as The Changing World Order and The Principles of Success, which can be helpful.
