Posted on July 15, 2021  (Last modified on January 19, 2023 )
4 minutes • 692 words
Table of contents
To quote one of the most famous investors to have ever lived:
If you don’t find a way to make money while you sleep, you will work until you die.
I didn’t take Buffett’s advice lightly. I decided to educate myself on how to earn money while I slept. After all, who want’s to work until they die? Without a shadow of a doubt, I can say that one of the most valuable skills I learnt in life was to invest.
So what is investing?
To understand what I do, how I do it and why I do it, it’s crucial to start with a definition of what investing actually is. There are a lot of misconceptions around the topic so let’s clarify. What actually is an investment?
An investment is simply the dedication of a resource (usually money) to own or control an asset with a view to attain an increase in the value of that asset over time. Investing, therefore, requires a sacrifice of some current asset, such as time, money, or effort so that you achieve a return when you capitalize on the value of the asset after a period of time.
To put it simply and in less abstract terms, an investor is someone who puts money into financial schemes, shares, property, or a commercial venture with the expectation of achieving a profit after some time.
What do I invest in?
One of the most important aspects of investing is that each investment comes with an ‘expectation’ of getting a return. The profit isn’t guaranteed. To me, a good investor is someone who will be aware of precisely what the expected return is and has weighed it up with the risk of losing out on any of the principal amount invested. As I am trying to be the best investor I can, I am always looking for not only investments that maximise my return per unit of capital invested but also investments that are safe. I am essentially looking for opportunities that maximise my risk to reward ratio.
On top of that, there is a universe of potential investments that I can select from. Not all investments are available to me due to their location, capital requirements, or management needs. Once this natural filter is applied, I can then apply my own filter based on my investment criteria. What you will often find is, the universe of actual good investments available is very limited.
The available assets will include property, businesses to buy, stocks held for long periods and business ventures to invest in. When taking into account the risk/reward ratio of all these available assets, I tend to lean towards property and businesses to buy.
Why do I buy property?
There’s an expression in the investment community: “safe as houses”. Property investment is one of the few investments where an expected return can be calculated to an acceptable range of accuracy to the point where it can be regarded as a ‘sure thing’. When it comes to property investing, there is a well established market for buying and selling. The institutions that take part have regulations they need to follow. The agencies and law firms all follow a well defined code of conduct. And there are very old laws governing the transactions which allows for a protected and safe investment environment.
Another important reason to choose property investing is that leverage is easy to come by. Borrowing money against this asset allows you to amplify gains to the point where mouth watering returns can be had. The competition to lend in this market is such that rates of lending are usually very good. Even with the recent rise in interest rates, there are still some great opportunities if you shop around.
Why do I buy businesses?
Investing in businesses is one of the most risky, speculative form of investments. If you buy a business outright, however, you can control the risk. If you know what you are doing, you can even reduce the risk down to something where the risk to reward ratio makes owning a business one of the most lucrative forms of investment.