Investments 101: Your Money at Work, some perspectives
Whether you ever decide to reach out to us and seek our help and guidance with your investments or not, perhaps the foregoing will give you some helpful perspectives. This could be your first I’m Curious page or one of many. Regardless, everything in this site is devoted to helping you achieve a better outcome from your money at work.
You may find some of the following perspectives on investments seemingly trite and a bit simplistic. However, maintaining a simple perspective on investing can help to separate the sales pitch from the investment opportunity.
Investment is the dedication of an asset to attain an increase in value over a period of time.
Investment requires a sacrifice of some present asset, such as time, money, or effort, in pursuit of a better future outcome. In finance, the purpose of investing is to generate a return from the invested asset and measured as an increase in dollar value.
Investing is as old as mankind’s time on this planet. Every day we all awake with one fundamental goal; How do we get ahead? This can mean, preserving what we have, or increasing what we have. Investing is simply our means to an end in pursuit of our self-interests.
We really have 2 approaches to satisfying our self-interest: you at work and your money at work. You at work, no matter how skilled you are, will have a limit. Time, sleep, physical or mental capability all limit your achievable outcome. Your money, however, doesn’t have a limit. It doesn’t sleep, its timeless, there are no inherent physical or mental limitations. If used effectively, long after your mental and physical skills have diminished, your money can continue growing and providing. Money is a tool, and your well-being is dependent upon how you use your tools.
We human beings are at once predictable and spontaneous. We are also contradictory: Acting in our self-interest and seemingly also acting in ways that are harmful. Generally, we all awake every morning, fixated on one fundamental directive…how do we get ahead. From the perspective of investing, we all operate from a position of bettering our own self-interest. However, in any investment transaction you have a buyer and a seller of a security. One of them is wrong. One thinks they are getting full value, and another thinks they aren’t.
New Issues come to mind. Simply, if you are the owner of a company and you want to maximize your value that you derive from your company, are you going to sell when the value of your business is at a low point? I would think not. Instead, you will sell off a piece or substantial amounts of your business, when you can maximize your ownership value. As the buyer of a new issue, one has to ask if the near-term future value justifies the current stock price? We don’t have an answer. However, being clear eyed in the purchase may save a prolonged period of buyer remorse.
We are all competing with each other to get ahead. Yet we also need to cooperate with each other in a social contract that combines skills and resources to mutually benefit each other. The investment marketplace, no matter how imperfect it is, attempts to provide a level of trust. Regulations have been created and modified from time to time to address the perceived and actual ills that beset investing. They are designed to create a level playing field and establish a sense of trust in the system and integrity of both data and advice. They don’t always succeed. They frequently miss the mark. Not infrequently, regulations address a problem or issue that has wrecked havoc upon the market, only to sow the seeds of another problem, years down the road. This said it is important that every person who touches your money in some way, should be accountable to a regulator and a set of well thought out regulations. Why: It’s not our money. It’s your money.
Sentiment, emotions, momentum…head versus heart. We are all hopeful that the investments we make will bare fruit and give us a positive return on our money. Sadly, this is not always the case. A very wise former boss once said, “Understand the consequences of your actions and act accordingly.” Ray LeFaive. To often we all react to an event and fail to pause, however briefly, to then assess the consequences. Frequently successful investors in fact understand consequence and are guided by this next iteration of the thought process.
This said, any casual observers of investment markets will offer examples of businesses and their stock values, that in no way represents a profitable company. Many tech firms come to mind. The lack of profits and revenue are often no impediment to runaway stack valuations. This momentum can continue for prolonged periods of time as the investment marketplace buys into the promise of a better more profitable future, or, some much larger firm buying this unprofitable company for its “technology”. Regardless of these moments of disconnect between value and profitability, eventually all companies must generate a profit to stay in business. Understanding why you’re buying something and remaining clear in your reasoning can help you avoid mistakes of emotion.
Things happen. We are responsible for our bad judgement. However, events can conspire to defeat even the best and most well thought out investments. 9/11 impacted many people and led to significant declines in the market. There is nothing anyone could have done to predict this tragic event. All of us as investor just had to deal with it. Markets eventually recovered and money was made. Investment focus changed. Some industries like Airlines suffered, and some industries thrived such as security firms and defense contractors. We adjust and move on…Why? Because we all ultimately want and need to improve our lot in life. We can then conclude that Risk is contextual. Circumstances can conspire to change the factors that affect value.
9/11 changed the Value attributable to some investments. If we look at the aforementioned Airline Industry, 9/11 changed the fundamental cost of flying. Security procedures, equipment, flight scheduling and processing all conspired to change the costs associated with flying. Factors such as interest rates, money supply, new technology, evolving demographics, emerging competitors, fluctuating popularity, social influences are just some of the things which can impact investments and the growth or lack thereof of our investments. Understanding consequence can help you access to value of an investment going forward.
The single biggest factors that measure Value are simply, Revenue and Expense and the Margin between these 2 leading to Profitability. If the expenses of running a business exceed your revenue, then this business will not stay open for very long. If the market will buy your goods or services at a price which exceeds your expenses, then that company makes a profit. How sustainable this revenue expense relationship persists, helps to establish the resilience of the stock value, and may contribute to the regular sharing of these profits in the form of dividends with the shareholders. Dividends are your share of the profit declared by the company. There are many companies that consistently produce a profit and consistently deliver a dividend. Many investors look for these companies and hold these stocks in a portfolio for significant periods of time…maybe decades. Other company’s dividend fluctuates and consequently may be held by an investor for shorter periods of time. Cyclical industries which have periods of regular profitability and other periods in which earnings (profits) are more difficult to maintain, may be held for shorter periods of time.
Professional investors have a Buying and Selling Discipline. This can apply to individual securities or the broader market. It’s not a timing issue, which is really a mugs game. It requires assessing what the value is and determining whether buying something at current value makes sense. On the flip side, this also requires a sell discipline, which guides you in your decision to sell a security or the broader market. Does the current price of the security or market, justify continuing to hold either an individual security or the broader market going forward?
The foregoing isn’t intended to be comprehensive nor conclusive. Books have been written about investing by knowledgeable professors, experienced investors, a range of economists, business leaders, sociologists and a few politicians. The myriad of opinions and experiences all add a constructive contribution to the study and pursuit of investing. Some stand the test of time. Some rise and fall subjected as they are to current circumstances.
We try to stay in the moment and attempt to understand the wealth of factors that can affect your financial well-being and sense of security.
Perhaps now is the time to speak to a qualified professional.
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“Let him who would enjoy a good future waste none of his present.”