Use an investment management system for personal investment management

When the term investing comes up the first thing that comes to most peoples’ minds is stocks, bonds, property and gold. You think of hedge funds, mutual funds and get rich quick schemes. This is the wrong way to think about Investing. You need some Financial Therapy to help you understand what investments should be in your life.

Basic investing

The first step in investing is to invest in you. You invest time and money into an education and a career or business. You start savings accounts that make interest. You need transportation to function so you make a choice that is in line with your life goals. You will always need a place to live so invest in your home. You may invest in a company pension plan plus you may choose to build a personal retirement nest egg within a tax protected plan. Once these start to accumulate in value you need to become a more knowledgeable investor. You need this for two reasons. First savings and investment certificates are high safety low yield investments. You may wish for faster growth so you may want to shop for more adventurous and rewarding investments. At this point I suggest you look no further than using the compound interest tool. You don’t need to go to higher risk to get the higher yields you crave. The second reason you need to raise your investor awareness is that there will be a host of liars, scammers, cheaters, chiselers and swindlers trying to steal your nest egg. Know who they are and how to spot them.

More sophisticated investing

As you grow in your knowledge of the investment world you will want to try some of the other tools in the marketplace. Getting business done in any society requires that capital be supplied to a business to buy the machines to get the job done by the workers. Then the fight is on as to who gets what share of the surplus (profit) created when the produced goods or services are sold. In a capitalist society, the capital is raised by selling bonds and stocks on market or exchanges. If the business is successful the bond interest is paid and you get your balance back when the bond term is finished. For stocks, value may build in the company and if the number of stocks issued remains the same, each stock is worth more as the company’s net worth grows. Bonds have a cash flow component in that the interest is paid on a set schedule. Stocks may a cash flow component in the form of quarterly dividends. The important thing is that these investment tools are real. They use real money to employ real people to get a worthwhile job done in the economy. Always make sure that your investments are real, just like you.

Steve's suggested reading:

If you are going to this level of investing here is a book that is the best coaching you can buy. Benjamin Graham was the mentor of Warren Buffet. You can use it too. I have and it works. I was lucky enough to read the Intelligent Investor a year ago last march when the market was full of bargains. I know a bull market makes you feel smart but this book gives you the tools to succeed in any market. It also understands your limitations and gives you strategies to succeed whatever parameters your capacities and time allow you to devote to this portion of your life investments. If you really want to peel the next layer off of the investment onion, buy Security Analysis and read it. If you can understand it you are ready to move to the Sophisticated Investor level.

Sophisticated investing

There are some people who are very good at making real money with real businesses. Hedge fund managers all claim that they are overachievers in the investment marketplace. They let you in to risk your money and charge you liberally for the privilege of getting in on a piece of the action. There are two problems here. When they make a mistake, you lose 100% of the loss and still pay all of the costs. If they succeed that may take up to 25% of the profit plus you still pay all of the costs. The second problem is that some of these guys are pretenders and really do not perform as well as advertised. They are deeply insulated from the customer (you) and when loses or swindling occurs it is hard to recover your money.

Another high yield investment is private companies. In this case you want to know that you are investing in a company that has a good product and that this company is well managed by executives that have a history of success. Normally they provide high yields on investment in the form of high interest rates on bonds. They may offer you the opportunity to be part of the process of taking the company from a private company to a public company. By getting in early you will become rich. In both cases you are rewarded well for engaging in a high risk investment. In the first case, the cash flow should pay for your investment in full in 3 to 5 years. In the second case, it can take years to decades to take a company public. Very few executives have the knowledge and skill to do this so the success rate is low. As few as 1 in 100 actually go public and as few as 1 in 1000 actually produce the huge gains to make the risk worthwhile.

The best definition of a Sophisticated Investor is one whose investment portfolio alone(not his personal net worth) is worth over $250,000 and is invested in at least 20 different investments. He can also understand the book "Security Analysis".

Investment versus Speculation

In the last example, putting your hard earned savings into such a proposal cannot be called investing. That is speculation. You are taking a gamble. You are making a bet that will only succeed against the odds. Buying precious metals cannot be described as anything other than speculation for the regular Joe or Jane. They get panicked into buying or selling their gold or silver and have no idea of where the value is going or why. You can call something an investment if you can see that your capital, your money is blended with some labor to add value to some commodity, product or service. Anything else is speculation.

How do I tell the difference?

All businesses need to have books. They need to have very formal budgets and balance sheets. They need to fill them out monthly, quarterly and annually and submit them to the authorities whether they are a private or a public company. To be a sophisticated investor you need to be able to read the books and comprehend what they mean. This is call doing due diligence. Performing “Due Diligence” is not just knowing how but actually taking the time to sit down, read and comprehend how this company is actually doing. You have to be able to know when they are lying about the finances of the company. Executives will lie and “cook the books”. They leave clues and to be a sophisticated investor you need to know what the clues are and be able to find them in the books.

Conclusion

Even for sophisticated investors, there is still risk in investing. A more experienced investor will rate the risk and expect a return that will be in line with the risk taken. He will take steps to protect his working capital. If you are a capitalist the first rule is to never lose your working capital. You would never invest 100% of your nest egg in one investment. The second to fifth rule for a capitalist is to diversify, diversify, diversify and diversify. You diversify the types of investment. You have cash, property, savings, bonds, stocks, precious metals and mutual funds. If one investment loses the others will offset the loss with stability or with gains. Similarly, if you own stocks own up to 10 and in difference indexes. Have 2 or 3 financials, some utilities, and some consumer goods and so on.

It takes time to be a sophisticated investor. Make sure you have the time. Fill out your life plan sheet and make sure you have the time to accomplish the goal of being a sophisticated investor as well as all of the other things you want to do. If you don’t, your best bet is to use the compound interest tool and follow the first rule of capitalism…never risk your working capital. Put your money in safe savings instruments that pay compound interest.

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