You may have heard that a confused mind says “No.” So today my goal is to simplify investing so that you can perhaps say “Yes.”
There is no doubt that investing in today’s world is complicated. It is no longer “just” stocks, bonds and cash. In fact, on a broad spectrum we look at 49 different chassis for investing. Yes, 49…and that is only the beginning. Just as an example, did you know at the end of 2014 there were 7,923 different mutual funds? 1. Mutual funds are only 1 of these 49 chassis. All I can say is that it is a good thing we have Aaron, who spends 99% of his time in research and due diligence. And since these numbers are increasingly rapidly, it is a good thing he has a “mini me” in training.
Clearly investing is an extremely complex environment and one that naturally can create a lot of fear and/or stress. The good news is that the basics of investing have never really changed. When you boil down any investment you have one of two things: ownership or loanership. In other words, you either own something and are counting on that something to grow, provide you income, or a little of both. Or you loan something and are expecting interest on the amount you loaned and a return of capital. It doesn’t matter if it is a CD, a stock, a mutual fund, hedge fund, an option, etc., etc.—that is the basic premises of an investment.
Another principle of investing that has never changed is risk. Many times in life we are told if we take 0% risk, we can only expect 0% return. And really, 0% return is the best case scenario if you are taking 0% risk. There is risk in everything, even doing nothing. Remember that ever present thief of your money called inflation (the fact that the cost of living every year goes up)? Well, if you have $1,000 in the bank today and inflation is 4%, which many analysts would agree it is today, that $1,000 will only be worth $960 next year. In other words, 0% risk meant a -4% return. We call this going broke safely. On the flip side, taking maximum risk could be called going broke insanely.
The problem with risk and all the measurement tools Investment Analysts use for it, is it is still really hard to understand. So again, let’s go back to the basics of how risk is created. I want to tell you a story about Bob.
Bob woke up this morning and went to his kitchen, turned on his GE light. He started his Folgers coffee in his Black & Decker coffee maker. While his coffee was brewing, he poured himself a bowl of Kellogg’s cereal. He then commenced to the bathroom to get ready for work. He did all of the normal things we all do: washed his hair with Suave shampoo, brushed his teeth with Colgate toothpaste and a Crest toothbrush, and put on his Fruit of the Loom underwear. Once Bob was ready, he piled in his Ford truck and drove to the nearest Exxon station to fill up with gas. Bob then went to work using his Xerox paper, Bic pen, and Dell computer. After a long, hard day he arrived at home, where he pulled out his Stouffer’s microwave dinner, warmed it in his Sony microwave, and turned on his Panasonic TV to watch the news. After browsing on his Apple iPad and talking to his daughter on his iPhone, Bob settled into his Sealy mattress for a good night’s rest.
To understand risk we again have to really understand what we are investing in. Some people are scared to death of the markets because they don’t understand them. The funny thing is that most of the markets are made up with things we use every day. I want you to think about something for a minute. Do you think people will stop brushing their teeth in the future? I sure hope not! Now we might brush them differently, but I don’t think we will ever stop. Second question: Do you think our world is growing in population and more people will brush their teeth in the future?
The truth about investing in a company is weighing what that company’s future will look like. But that is not nearly as simple as it sounds - there are a lot of factors to weigh. First, ethics (kind of a big one), second, is there a demand for what they offer, third, can the company adapt to changing world, fourth, taxation, politics, structure, etc. etc.
I want to give you a new quote about confusion from writer, Tom Peters. “If you’re not confused, you’re not paying attention.” My challenge for you this week is to NOT say “No” simply because you are confused. Instead, gain enough understanding to help yourself and take a little risk.
- org. 2015 Fact Book