Investing as an option - Foundational Principles for Successful Investing I

It’s interesting to always hear people talk about starting a business but never consider investing as an option. I understand there are many definitions out there with some technical financial terminologies one might have to grapple with. However among the surest and simplest definition I have ever come across is “Investing is laying out money today to receive more money tomorrow”. Warren Buffett (Third richest man in the world, according to Forbes rich list 2010)

Among the many options under consideration is share investing. Until recently share investing was considered to be purely in the domain of the wealthy. The few who considered it as an option saw only a few ways of doing so easily. Many folks, who had money and wanted to invest, left it to the professional stock brokers.

However, deregulation of the financial markets in the last two decades has changed all that, from the introduction of new investment products to changes to the tax systems.

Trading in overseas stocks, cash management trusts, instalment warrants, exchange traded options, dividend imputation, reset preference shares and endowment warrants to name a few were almost nonexistent. 

Currently about 50% of investors are “mums and dads” investors who either own shares directly or in managed funds.  Many however have unfortunately been “burnt” in recent years, partly because they did not understand the risks of investing in financial markets.

It’s become a common mantra to hear governments around the world hammering home the importance of people taking control of their own financial future. Government funded pensions are under pressure making it unsustainable and unreliable to provide an appreciable standard of living for the pensioner.  Not saving and investing could potentially cause a significant decline in your retirement living standard.

When we get to be asked the question who wants to retire with a few millions? Almost everyone screams out a a big 'I' for an answer. But the question we need to ask ourselves is "How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case". Robert G Allen

Lets consider the average life expectancy as a basis for this analysis. It varies from continent to continent and even from nation to nation. Let’s assume for a moment that an average life is about 80 years. If a person retires at 60 years of age, the savings they have accumulated in the 40 years of their working life will be needed to fund 20 years or more of their retirement.

Deregulation of financial markets, interest rates and currencies means that the market determines the value of investments and not government decrees. This provides opportunities for investors who have done some level of study of investment options to build wealth and for unwary investors to lose wealth. I couldn’t agree much with Benjamin Graham who said “The individual investor should act consistently as an investor and not as a speculator. This means … that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money's worth for his purchase”.

You must understand the opportunities and risks. The ground rule is that if you want to be a successful investor in financial markets, you must educate yourself about investing. Even if you put your faith in a licensed investment advisor, not all are competent. It is essential that you understand how the financial markets work so that you do not put your hard earned money in the hands of an incompetent advisor who is only interested in the commissions available. 

Before you start throwing up your hands in the air. Am not saying you need to know everything about investment. Am simply saying "Don't invest in anything that you don't understand. Do your research first". Paul Clitheroe. And like Warren Buffett rightly said "Why not invest your assets in the companies you really like? As Mae West said, "Too much of a good thing can be wonderful". In another interview when asked what he likes to invest in, he responded "I like to buy things I can understand. I do a lot of research on things". 

To be continued ....................

Watch out for the concluding part.