Investing The Smart Way

Investment Mastery

Investing is one of the greatest personal journeys that one can embark on, it is, however, a journey that can get complicated when one does not know of a path to follow; picture yourself as a six-year-old and someone came to you and told you that you are writing your final matric exam the next day. How would you react to that instruction? If you did write your final matric exams the next day what would you put in those papers and what are the probabilities of you passing your finals? The same analogy can be used when deciding your investment journey, if you start from the highest level of risk and reward without first understating and gaining mastery of lower levels of risk and reward you are writing your final matric exam without first learning and passing the grades that prepare you for the final matric exam. My purpose in this writing is to give a highlighted pathway into understanding the fundamentals of wealth building and specific ways to navigate through your investing journey.

The 3 levels of investing

Level 1: Savings-Low Risk-Low Reward

How much do you earn every month? Multiply that by the number 3.

Example:

R5500 x 3

=R16 500

The number that you get is the goal that you use to accumulate the different asset classes in each stage of wealth growth. The total number represents 3 months’ worth of income, the first goal is to have this amount in a savings account which generally produces a monthly return of 4-5 % depending on the savings account type, such as the 60 Day Notice and Money Market are the savings accounts that generally give the biggest returns in Savings, as I always say to my clients and students the purpose of A savings account is to grow your self-worth and to teach you how to develop a long term vision for money and purpose. It will build you up psychologically in terms of knowing the difference between putting money into things that grow and things that lose value over time such as items that end up in storage to collect dust.

Level 2: Long-Term Investing- Moderate Risk- Moderate Reward

The second tier/ goal is to have 90 days’ worth of income in long-term investment classes, these include and are not excluded to Bonds, Index Funds, ETF’s and blue-chip stocks. These investment classes normally average between 6% to 8% in returns and have growth potential in the form of share prices. These investment classes also require a deeper sense of understanding and research, for example, there is a vast difference between the types of bonds that are available for investments, in investing blue chips one needs to understand the 4 fundamental business economics that each business represents.

1. Industry; what industry is the business operating in, the industry that the business operates from determines the income potential that the business has in income.

2. Profits; how much profit does the business make, Income minus all expenses (fixed and Variable Costs).

3. Savings and Investments; how much of the monies that come into the business how much does the business save, the savings portion will show how prepared the business/ company is for the down turns in the market, how the business will thrive against the competitors and a great example of this is the Microsoft Co. Bill Gates has saved a full years Business expenses to pay off every single employee in case something bad happened to the business. Investments represent all the other Tangible and Intangibles that the business has ownership of, some businesses invest in other industries and businesses that bring great returns; you find that a banking business has property ownership as an income generator, the more investment and asset class diversifications that a business has the stronger it is because it has the power to sell off some of its Assets.

4. Dividend Pay and Last Dividend Payment Date; it is important to see if the business/ Investment Class pays dividends year on year, or every 3 months, by finding business/ investment classes that have a good track record of paying dividends the better the business is doing and returns you receive.

Why invest in ETF’S and Index Funds? Investing in ETF’s and Index funds is a great way to build up your skill set and knowledge of investing for the reasons that they are low cost, they do not have monthly costs for management of the investment, they usually are designed to mirror the most successful long term market performers, these baskets of investments give you insights into what makes a company a great investment and the actual basket give you the information of the companies that they track e.g. JSE TOP 40 Index fund tracks the top 40 performing South African Listed companies. By understanding the companies under that index, you will get a glimpse of the most profitable industries, and how those companies make profits and use profits to grow.

Level 3: Speculating/High Risk-High Return

Speculating is putting your monies into instruments that are driven solely by the growth potential, examples of these instruments are bitcoins, forex trading, penny stocks, new businesses, and IPO Shares of newly listed companies. The underlying psychological drive behind these investment types is that you can make lots of money in a short period, and returns can sometimes go to levels of 600% returns, the other side of these investment types is that they can also wipe out all your monies invested very quickly as well.

It is important to note that the success rate at this level is very low for people who have made great returns, the greatest questions to ask at this level of investing when you do come across someone who has succeeded in the past are; How much money have you lost in the past in total in this type of instrument? how much of your total net worth is invested into these types of instruments?

The greatest investors only invest 10% of their total Net Worth into these types of instruments, the greatest wealth builders such as Warren Buffet and Bill Gates do not have much invested in these types of instruments, there some great wealth builders who have made a lot of money in these instruments and one of those is George Soros. It is also important to notice; when someone makes lots of money off a single instrument in this tier he/she gets a lot of media attention for a while and then disappears because it is very difficult to beat the market and to do it consistently is near impossible.

“Stair Stepping investing”

The greatest way to gain mastery in investing is by stair-stepping- starting from the lowest possible risks and returns to the highest possible risk and reward levels of speculating. The benefits that you get from stair stepping are; you get to put money into different investment classes over time through dollar cost averaging, you build stability of income and a good foundation of cushioned money for you to fall back on because if you have 90 days’ worth of monies in Savings you will not be affected by the highs and lows of the market evaluations of your holdings in the higher tiers of investments and other position based investments with your speculative investments.

EXERCISE:

1. Write down your monthly income at the current moment.

2. Take your Monthly income and multiply it by 3, this will indicate your 90 days’ worth of money that you will need to have in savings before going on to higher tiers of investing.

3. Research before you invest in any investment class.