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This is not another article on why you 'need' to invest. We have already got so many articles on that subject. What we are looking at today is something deeper and more personal. We are going to discuss on why you 'want' to invest.
If Investing is defined as "an operation which upon thorough analysis, provides safety of principal and a satisfactory return", then we can say that we invest so that we can generate more money. (Obviously). What I notice is that there are so many programs out there that teaches you how to make money, however, what they do not do, is to discuss on why you want to make money. Many might think that knowing why you want to make money is not important or it is so obvious that making money is a good thing and there is no need to discuss about it. However, this is a very dangerous mentality. Let's do an exercise with me, try to ask yourselves the questions below.
Why do you want to make money?
When you have money what can you get?
Why do you want to get that thing?
Do you agree with me that Money is just a piece of paper or some numbers in your bank account that you exchange in return for some goods or services? Generally, we want to make money so that we can afford to buy the things we want, go to the places with the people we love, to have more time, perhaps some may be more noble, that is to help the less fortunate people. No matter what it is that you want to get with the money you make, I believe we can say that what we ultimately want, is to get happiness. Buying the things you want and going to places you like may bring you happiness, having more time may let you do the things you like or to spend more time with people you love,which also brings happiness, even helping other people may bring joy to our lives too. (Notice the keywords, happiness, love and freedom to do the things you like.)
The danger with us is that if we do not clearly define these ultimate gains that we want,is that we might lose them while chasing money. How often do you see people who blindly chase money while ignoring their loved ones or those who get depressed along the way or those tying themselves up with the job they don't like so that they can have more money. I certainly do not want that to happen to me, therefore, I have clearly defined what I want (You should too). That is, happiness, love and freedom. It is not logic to sacrifice these for money because it is a just a tool to buy those things. Do you agree with me that money can't buy everything? You certainly can't buy back the deceased loved ones that you have ignored while making money.
Then the question is, does money buy happiness? The answer is yes, and no. Yes, it does buy happiness, but it is for very short term. Have you ever experienced the excitement, thrill and happiness you get when you have purchased a new car? Of course you are very happy with it's sleek look, fast performance and comfortable seats. But after 6 months, does it feel the same? No, by that time, it will only be just like any other things, dull. You will resort to buying other things to give you the temporary high of happiness. This is not the way to achieve happiness.
What's even more dangerous is the greed that money brings out. You just can't have enough.
I have had first hand experience of this problem. Just 15 months ago, making my first profit has been so magical to me. RM1,500 is so much and I am so grateful and happy to be able to make that kind of profit. However, as I notice, I became more and more discontent,that even when making a profit of RM15,000, I still do not feel happy. Why? It is because I have already grown numb to that kind of earnings and is now aiming for much higher gains. Is this a good thing? You can argue so, as it helps me to aim high and achieve more. But how much is enough? or will I ever get enough? One year ago, I thought that I would be very happy to be where I am today .However, I notice that the higher you go, there is always something that you are not satisfied with, always someone that you want to be better than, you will never stop as long as there is room for growth.(I'm thinking about millions now) So, is money evil? If you do think so, please contact me, I am very willing to adopt them from you.No,I believe money is like fertilizer. It enhances you. If you're greedy within, it will make you more greedy. If you're already happy, it will enhance that happiness.
So,now you would ask, which one am I ? The one that is happy inside or the one that is hungry for more. I would say both, though I want to be better and better, I want to do it healthily, that is without sacrificing happiness,freedom and loved ones. The most important revelation comes from this understanding.
"Happiness is not found at the destination, happiness should be throughout the journey".
How to find happiness throughout the journey? I believe the key lies in gratitude. To be grateful of what you have now. Think about it, if you're reading this, you should be grateful. How many people doesn't even have access to clean water and ample food, not to say to have access to internet and learning sources. Even if these people wants to improve their lives, the lack of resources and the environment makes it extremely difficult for them to do so. I noticed that as soon as I focus on being grateful of what I have, I immediately felt joy in my life. I have a loving parents, close friends that support me, a comfortable house, a business that I enjoy doing and most importantly, health. Think of all the things I could accomplish with the health that I have. You really don't want to sacrifice health for money. One of the things that I am most grateful of is to be blessed with the knowledge of value investing. Because of it's low risk,high return and passive nature, it is a way to generate wealth while giving me the freedom I want without the emotional stress involved (Unlike trading, which requires time in monitoring that also taxes on the state of mind)
Since making money is not a problem anymore (I may be wrong, but I believe that as long as I continue investing in stocks by following the right method + right mentality , I believe I will achieve the financial freedom I want eventually), I can now try focus on doing what I love and spending time with loved ones while I still can. Each day, I will try to find things to be grateful of in my life, and you should too.
(Also,understand that happiness is a choice, you can choose to be happy now for no particular reason (and also get out of depression), but that needs a very good control of your state of mind, for us now, we can be happy by focusing on the positive things, life is already tough, don't make it worse by focusing on the negatives.)
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Should you borrow money to invest?
It is a very common thing to do in property investments. Almost everyone borrow to invest in properties. Why not? When the interest rate of the loan from the bank is lower than the rental yield you would get from your properties? Not only would you get the difference in yield and interest rate, chances are, you can even get the capital appreciation of the property as a reward. In fact, if you have RM 1,000,000, instead of buying one property, you might choose to instead, use the cash to pay for the down payment of 10 properties and borrow the rest from bank. If all goes well, you can enjoy the capital appreciation of not 1, but 10 houses, possibly 10X the return you would have get if you have invested all RM1,000,000 in cash in one property. This is a no-brainer.
At this point you may think you have made a very smart decision.
How about in stocks?
Should you borrow money to invest in stocks?
If you're still unaware of, you can..actually borrow to invest in stocks..using this facility called buy on margin. That means to say that if you have RM1000, you can buy a stock worth of RM2,000 (or more depending on your brokerage.) Now the question is should you buy on margin? Again, if you have a stock that promises you a dividend yield of 8% and the interest rate is just 6%, then you should be able to get a 2% free cash. Very clever move,right?
(If you're unfamiliar with buy on margin, it is actually like you use your stocks of RM1000 as collateral to borrow another RM1,000.)
It depends..(Please don't hate me,just pointing out my concern)
Have you ever thought of what would happen if all of a sudden, your dividend yield might not be able to pay for your interest rate?
At this point you might think, "It won't happen,the company is stable"
Really? What if it decides to keep the dividend to fund new projects?
Well..you might have some saving to pump in right? Okay then..but what if you get a margin call? When your stock plummet in price and the brokerage calls you to top up more cash.
(Please don't say it will not happen, we are human not God,we can't predict the future. What if there is a black swam(911 Incident)).
Do you have that kind of cash prepared? Else, your share will be sold at a low price which is bad for you. Meaning to say, you lose your holding power thus incurring more risk. (More risk means more likely to lose money)
Then again, some property investor will say,
This will not happen to me, property rarely drop in price. I will be safe. Or really?
Is your interest rates from the bank loan fixed? or does it fluctuates? What if your rental yield become less than your interest rates? Even if your interest rates is fixed, you could be affected by the market condition. If there is an increase in interest rates and many people default in the loan, the properties will be sold at huge discount thus lowering market price. Your property might be revalued lower due to this and you might get your home loan margin call. (Yes,it exists). Do you then have the cash to top up?
So the point is never use debt to fund your investment?
No. What I want to illustrate here is debt is a very powerful tool. But like a double edged sword,it could help you or harm you. The key here is to buy at the right time, right after a crisis,when things are so cheap,you wish you could buy them all. This is the time of minimal risk,so you can use debt. Second thing is, predictability, only use debt to fund investments that is very predictable and stable. (Example: Buying companies like Nestle instead of Apple or Blackberry)
Final words, if you really want to supercharge your investment return using debt,make sure you know what you are doing and have factored in the risks before you make a decision.
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It has been shown through research that 80% of the businesses fail within the first 5 years. Out of the 20% who survived, another 80% of it would fail in the next five years. That is to say, only around 5% of the businesses that got started, survives. If the 80/20 rule is true, only 1% of the businesses will thrive.
What can we learn from these statistics? We can safely say that entrepreneurship is a harsh journey. It is often the most challenging venture but it provides no guarantee of success, no matter how much money and effort you put into it especially in this fast paced, exciting yet challenging time where the world is changing at a rate like never before. A company can go from nothing to billion dollars in net worth (Facebook) and from billion dollars in net worth to almost nothing (Blackberry) in just a few years. It is also because of this reason that I do not like to invest in industries that are very volatile (example : technology sector). No one can predict what will happen in the next 6 months, not to say 5 years. Even when you thought that you're enjoying the lion's share, some college kids could be working on a product in their basement that will make your business obsolete in no time.
So, what can you do to protect yourself from such phenomena? Invest in a great and sustainable business with solid track record. What is solid track record? To have a solid track record, a company need to be making increasing profits year after year for at least 5 years and preferably the business should be around for more than 10 years. Why invest in a company with solid track record? because if a business can survive for more than 10 years and is able to consistently generate high profit, it is already in the top 1% of all businesses. Why invest in the top 1% of the businesses? The logic here is simple. If 99% of the businesses fail within the first 10 years, why is this business still around? If you look at all the companies that has been around for a long time and has been pretty lucrative, you will find that these businesses possesses a special quality that separates them from the others,they all possesses a competitive advantage. These businesses may have secured a government license (PLUS highway, Genting) , provides product or service that is part of customer's habit (Nestle, Tobacco, etc) or just having carved a brand name for themselves (Padini, albeit a very weak competitive advantage). These are the businesses that is likely to continue to thrive,even in turbulent times because of these advantages over their competition. This is exactly why I'm interested in these businesses. However, knowing when to buy them is another story that I will leave for another day.