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by Jack Moore, CA.
We need to talk about investing: what it is, what it is not and what
it should be.
It is generally considered to be the setting aside of discretionary income
for a rainy day. Discretionary means that one does not need it for required
things, like mortgage payments. It is mad money to be spent on creature
comforts or to be tossed to the wind without remorse.
There are three absolute necessities of life without any one of which we
will surely expire. They are: food to sustain us; shelter (roof and clothing)
to protect us from the elements; and other people to aid us in times of
sickness and of famine. We have no discretion in the spending of income
to sustain ourselves with minimum food and minimum shelter and the premiums
of insurance to be there in times of sickness, etc. (I don't sell insurance!)
Investing is not spending income on any of these necessities. It must then
follow that the purchase of a house in which to live is not an investment
and should not be considered as such. This is not negotiable.
Investment of that mad money may be allocated to three levels: minimum guaranteed
investments; those of a relatively speculative nature; and those which are
extremely speculative.
Minimum guaranteed investments are those which will provide a known income
after a certain date and for the rest of your life. A minimum number of
years are usually guaranteed. The guarantee has to be good: a government
or an insurance company of excellent repute and long standing. The contract
can be inflation-proof, but that affects your cost. These simple investments
tend to be quite prevalent and not terribly expensive. They should be tied
to income protection insurance which will continue your income should you
become incapacited and unable to provide your own. These contracts also
can be inflation-proof, for a price.
A company pension plan should not be part of your minimum. Employers too
frequently lose their objectivity over time and become motivated to get
their hands on the money in the plan. It is often such a large sum that
it blinds the beholder. If you have a choice, take the employer's contribution
and invest it yourself along with that which would have been your contribution
to the plan. If you have not choice, consider it in the speculative section.
Once you have your guaranteed minimum in place you should then look at the
next level of investing. This is where you don't really want to lose any
money. The size of gain is often in direct ratio to the degree of speculation.
Keep in mind that most investment councillors are in the game to make money
for themselves by buying and selling investments for you, or by virtue of
a fee for services. In both instances they win: you may win and you may
lose.
Stay away from mutual funds. On the surface they look like the only answer.
In reality, they tend to be so huge and so varied that intelligent investing
decisions just cannot be made, which is why they exist. The most important
fact is not what the fund is invested in but who are the fund managers and
what is their track record for the past seven years. As human beings they
eventually lose it. What goes up always comes down. It is like the races:
bet on the jockey, not the horse. In mutual funds, bet on the managers,
not on the fund. If your choice is directly in the market then do your own
research. Look for high net asset value ratios to share price. Stay away
from high net asset and/or net profit multiples. Seek out smallish public
companies in growth industries. Hold them for at least five years. When
you buy always have a value in mind at which you will sell to take either
your profit or your loss. Remember: pigs get fat, hogs get slaughtered.
A second piece of real estate may be considered but only for capital appreciation.
Buy very cheap.
Extremely speculative investments are those wherein you should expect to
lose your money. On the other hand you should expect to hit the jackpot
if you are lucky. This is where the broker or councillor comes into play.
These people tend to be on the inside while the rest of us are on the outside.
Almost without exception, an investment being touted is worth buying. The
secret is knowing when to sell it. Don't leave it to your advisor to keep
you informed. This is a serious game and if you want to win then you must
be involved daily in the performance of the investment. Often the advisor
will not know when the run is over and the fall in price has started. Do
not be greedy. Get out at the second sign and live to invest your winnings
another day.
Do not give your money to other people or companies to handle for you. Beware
of Trustees and Agents. Be responsible for your own actions. If you have
not got the time to do it properly yourself then don't do it.
Sleep tight.
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