moneyFYI
Financial Freedom Is Merely Organized Common Sense
Money and Investing Are Different
John Hozvicka commented favourably on a post recently and I tracked back to his wordpress site. Your pathway to investing in stocks
There are only a few articles so far and “The 14 Laws of Money” got my attention. I found #2 especially interesting.
Law #2 Never get emotional about money, stocks investments, it clouds the judgment.
Good relationships
We would all like to have a good relationship with money but many of us cannot because we misread the nature of the relationship. Good relationships are based upon trust, mutual respect, common goals, and a view of the future.
Money contributes none of those to the relationship so it is bound to be rocky if you are the emotional one.
Money knows nothing about where it came from or how you intend to use it. It holds no strong connection to you and can easily move on to someone else.
Understand money
When you understand that money is several things, each of which have value to you, you will be able to less emotional about it.
- Money is a store of value. You once traded your time and skill, or risked investment for money. The money represents the value of that trade until you choose to spend (consume) it.
- Money is a medium of exchange. It allows you to trade time and skill to someone who wants them even though they may not have anything you want to trade for. Acquiring and spending money are both forms of barter but money means I can acquire form one and spend with another.
- Money is a unit of measure. The unit of measure idea allows the idea of both prices and accounting. Prices help us understand value at a more intuitive level.
- Money is a trust agreement among all the members of society. If people stop beleiving a 20-dollar bill will be valueless. Theoretical physicist Avi Loeb gets it, albeit in a different context.
“Reality is that which doesn’t go away when you stop believing in it”
Currency would disappear instantly if we stopped believing in it. When you understand the nature of money you can deal with it better.
Money and investing
Money is the value we have bartered and have not yet consumed. We may consume in the future and we will earn yield by waiting if we are careful.
Investing is the time machine that moves money to the future with yield attached. There are upwards of 40 factors that affect how much yield you will get. Some are simple. Liquidity and risk of loss for example. Others are more subtle. Taxation of income, legality, availability, ongoing management, and fashion are less obvious.
When you buy a stock, you buy part of a business.
There are two forms of this.
- Treat it like a business and share in its earnings and growth over a long time. This is the classical idea of investing.
To be successful one must know three things. The value of the business based upon what it will earn in the future given the time value of money, and how the stock market prices shares. The two may coincide once in a while or they may average out to be close. The idea of value investing is to buy good business value when Mr. Market is selling his shares cheap, and sell them when Mr. Market is willing to pay more than they seem to be worth. This method requires some skill to assess value as a business and the patience to wait for Mr. Market to offer you the right price. - The second is to ignore the value of the business and to trade against the expectations of others in the market. If you can know what others are likely to do you can trade to advantage. Quant trading. It is lucrative if you are very good at it and devastating if you are not. There seems to be a wide divergence between average return and typical return. People either do well or badly. John Maynard Keynes summed up this style as,
“Successful investing is anticipating the anticipations of others.”
Understanding businesses is difficult and understanding the others is harder still.
The good news for investors
Business values tend to be more durable than the anticipations of others. Over the long haul, they will give you more predictability. The anticipations are mostly noise and eventually cancel.
People can build a portfolio of investments where diversity works to quiet the noise. Some people use professional managers for this and others do it themselves. Do it yourself requires considerable knowledge about businesses. More important still, it requires the temperament to sustain losses (fear) and make exceptional gains (greed).
Sometimes someone else can help you manage emotions and thus avoid the spectacular losses that are available to the poorly informed.
“Risk is what happens when you don’t know what you are doing.” Warren Buffet.
Think it through. You care about the money but the money knows nothing about you. Learn how to manage that kind of relationship.
I help people understand and manage risk and other financial issues. To help them achieve and exceed their goals, I use tax efficiencies and design advantages. The result: more security, more efficient income, larger and more liquid estates. Please be in touch if I can help you. don@moneyfyi.com 705-927-4770
I help people understand and manage risk and other financial issues. To help them achieve and exceed their goals, I use tax efficiencies and design advantages. The result: more security, more efficient income, larger and more liquid estates. Please be in touch if I can help you. don@moneyfyi.com 705-927-4770
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