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8/2/2019 Introduction to Investment
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QUALITIES OF SUCESSFULINVESTING
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INTRODUCTION TO INVESTMENT:
Investment is the commitment of money or capital to purchase financialinstruments or other assets in order to gain profitable returns in the form of
interest, income or appreciation of the value of the instrument. It is related
to saving or deferring consumption. Investment is involved in many areas of
the economy, such as business management and finance no matter for
households, firms, or governments.
An investment involves the choice by an individual or an organization such as a
pension fund, after some analysis or thought, to place or lend money in a vehicle,
instrument or asset, such as property, commodity, stock, bond, financial
derivatives (e.g. futures or options), or the foreign asset denominated in foreign
currency, that has certain level of risk and provides the possibility of generating
returns over a period of time]
Investment comes with the risk of the loss of the principal sum. The investment
that has not been thoroughly analyzed can be highly risky with respect to the
investment owner because the possibility of losing money is not within the
owner's control.
The difference between speculation and investment can be subtle. It depends onthe investment owner's mind whether the purpose is for lending the resource to
someone else for economic purpose or not.
In the case of investment, rather than store the good produced or its money
equivalent, the investor chooses to use that good either to create a durable
consumer or producer good, or to lend the original saved good to another in
exchange for either interest or a share of the profits. In the first case, the
individual creates durable consumer goods, hoping the services from the good
will make his life better.
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In the second, the individual becomes an entrepreneur using the resource to
produce goods and services for others in the hope of a profitable sale. The third
case describes a lender, and the fourth describes an investor in a share of the
business. In each case, the consumer obtains a durable asset or investment, and
accounts for that asset by recording an equivalent liability. As time passes, andboth prices and interest rates change, the value of the asset and liability also
change.
An asset is usually purchased, or equivalently a deposit is made in a bank, in
hopes of getting a future return or interest from it. The word originates in the
Latin "vestis", meaning garment, and refers to the act of putting things (money or
other claims to resources) into others' pockets.
The basic meaning of the term being an asset held to have some recurring or
capital gains. It is an asset that is expected to give returns without any work on
the asset per se. The term "investment" is used differently in economics and in
finance.
Economists refer to a real investment (such as a machine or a house), while
financial economists refer to a financial asset, such as money that is put into a
bank or the market, which may then be used to buy a real asset.
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In economics or macroeconomics:
In economic theory or in macroeconomics, investment is the amount purchased
per unit time of goods which are not consumed but are to be used for future
production. Examples include railroad or factory construction. Investmentin human capital includes costs of additional schooling or on-the-job
training. Inventory investment refers to the accumulation of goods inventories; it
can be positive or negative, and it can be intended or unintended. In measures of
national income and output, gross investment (represented by the variable I) is
also a component of Gross domestic product (GDP), given in the
formula GDP = C + I + G + NX , where C is consumption, G is government spending,
and NX is net exports. Thus investment is everything that remains of total
expenditure after consumption, government spending, and net exports are
subtracted (i.e. I = GDP - C - G - NX ). Non-residential fixed investment (such as new factories) and residential
investment (new houses) combine with inventory investment to make up I. Net
investment deducts depreciation from gross investment. Net fixed investment is
the value of the net increase in the capital stock per year.
Fixed investment, as expenditure over a period of time ("per year"), is not capital.
The time dimension of investment makes it a flow . By contrast, capital is a stock —
that is, accumulated net investment to a point in time (such as December 31).
Investment is often modeled as a function of Income and Interest rates, given by
the relation I = f (Y , r ). An increase in income encourages higher investment,
whereas a higher interest rate may discourage investment as it becomes more
costly to borrow money. Even if a firm chooses to use its own funds in an
investment, the interest rate represents an opportunity cost of investing those
funds rather than lending out that amount of money for interest.[5]
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Investment related to business of a firm –
Business management:
The investment decision (also known as capital budgeting) is one of thefundamental decisions of business management: Managers determine the
investment value of the assets that a business enterprise has within its control or
possession. These assets may be physical (such as buildings or machinery),
intangible (such as patents, software, goodwill), or financial. Assets are used to
produce streams of revenue that often are associated with particular costs or
outflows. All together, the manager must determine whether the net present
value of the investment to the enterprise is positive using the marginal cost of
capital that is associated with the particular area of business.
In terms of financial assets, these are often marketable securities such as a
company stock (an equity investment) or bonds (a debt investment). At times the
goal of the investment is for producing future cash flows, while at others it may
be for purposes of gaining access to more assets by establishing control or
influence over the operation of a second company (the investee).
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Investment related In finance:
In finance, investment is the commitment of funds by buying securities or other
monetary or paper (financial) assets in the money markets or capital markets, or
in fairly liquid real assets, such as gold or collectibles. Valuation is the method forassessing whether a potential investment is worth its price. Returns on
investments will follow the risk-return spectrum.
Types of financial investments include shares, other equity investment,
and bonds (including bonds denominated in foreign currencies). These financial
assets are then expected to provide income or positive future cash flows, and
may increase or decrease in value giving the investor capital gains or losses.
Trades in contingent claims or derivative securities do not necessarily have future
positive expected cash flows, and so are not considered assets, or strictly
speaking, securities or investments. Nevertheless, since their cash flows are
closely related to (or derived from) those of specific securities, they are often
studied as or treated as investments.
Investments are often made indirectly through intermediaries, such
as banks, mutual funds, pension funds, insurance companies, collective
investment schemes, and investment clubs. Though their legal and procedural
details differ, an intermediary generally makes an investment using money from
many individuals, each of whom receives a claim on the intermediary.
Within personal finance, money used to purchase shares, put in a collective
investment scheme or used to buy any asset where there is an element of capital
risk is deemed an investment . Saving within personal finance refers to money put
aside, normally on a regular basis. This distinction is important, as investment
risk can cause a capital loss when an investment is sold, unlike saving(s) where the
more limited risk is cash devaluing due to inflation.
In many instances the terms saving and investment are used interchangeably,
which confuses this distinction. For example many deposit accounts are labeled
as investment accounts by banks for marketing purposes. Whether an asset is a
saving(s) or an investment depends on where the money is invested: if it is cash
then it is savings, if its value can fluctuate then it is investment.
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Real estate as the instrument of investment
In real estate, investment money is used to purchase property for the purpose of
holding or leasing for income and there is an element of capital risk.
Residential real estate:
The most common form of real estate investment as it includes property
purchased as a primary residence. In many cases the buyer does not have the full
purchase price for a property and must engage a lender such as a bank, finance
company or private lender. Different countries have their individual normal
lending levels, but usually they will fall into the range of 70-90% of the purchase
price. Against other types of real estate, residential real estate is the least risky.
Commercial real estate:
Commercial real estate consists of multifamily apartments, office buildings, retailspace, hotels and motels, warehouses, and other commercial properties. Due to
the higher risk of commercial real estate, loan-to-value ratios allowed by banks
and other lenders are lower and often fall in the range of 50-70%.
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QUALITIES OF SUCESSFUL INVESTING:
Given the potential rewards, the risks being reasonable and given a method of
well-defined risk management the equity markets across the globe (to ourthinking) are the best game in town. However, the investor would require
qualities of head and heart to achieve this success. These qualities of the
successful investor listed and described below, would also be relevant to the
other financial markets.
Winners and Losers: Vast fortunes can be made and lost during brief periods of
trading in the equity markets. Now, what separates the winners from the losers?
The key to successful trading in the equity markets are not only attainable, they
can also be learnt and taught. The successful investor exudes self-confidence, self-
assurance and singleness of purpose. His handshake is solid, purposeful and firm.
He looks you straight in the eye. He is well groomed and dressed.
Attitude verses Luck: The winners realize and recognize the importance of a
positive mental attitude. They know that the power to achieve comes from
within; and that positive motivation overcomes all obstacles to success. They are
of the view that, one must have the correct attitude to recognize the opportunity
for success.
We do realize that, a positive attitude cannot be replaced by the concepts of luck,
1positioning or political influence. Though these methods mentioned earlier also
have their place in the scheme of things; and can and should be utilized to
reinforce our positive mental attitude, but not replace it. In our struggle for
success, a negative attitude can easily spell ruin, just as the lack of a positive
attitude easily inhibits success.
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Think, See and Do: To be successful, you need to emphasize on these elements.
First, you must think. You must think about what you want to do and how you will
do it. Next, you must see an opportunity as it develops. And lastly, you must act
when the opportunity presents itself.
You must think, see and do, as these are the important elements to success.
A counter view, comforting to most people: The investor hopes for success in
vague terms, he organizes for it. But, when it came to visualizing a plan of attack
(or action plan) he was sorely lacking. Then, he did not visualize opportunities
when they presented themselves. Also, because he was so intent on not missing
opportunities and unsure about what opportunities he is looking for. So, he did
not see the opportunities when they did present themselves. As the investor hadfailed to see opportunities, he could not act in order to get a successful result.
Success follows: Success will tend to take care of itself, if you provide the proper
psychological and behavioral background for it to occur. Goals are wonderful,
without them we would be lost. Yet, the road to success must be paved with
behavior, attitude, opinions and visualization. Each person has his own personal
psychology and response style. There are four elements that comprise the
essence of success theory:
The way in which, we as investors deal with loss and failure is just as
important, if not more important, than the way in which we deal with
success.
Effectively controlling and channeling emotions are two very important
issues in the equation for success.
Those who have been successful and continue to be successful as investors,
recognize the importance of market psychology and incorporate it in their
work. To be successful as an investor, you need to develop and maintain similar
attitudes, behaviors and opinions.
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Understanding failure: It is said that we learn more from our mistakes than our
successes. Although success is important, it is equally important to understand
failure and its role in shaping investor behavior. The idea is not to punish or
ridicule something done or gone wrong. But to understand it, correct it and do it
right in the future, so that the rewards of being right may reinforce the winning
behavior.
The weak link: The markets offer fortunes without limit to those who master the
few simple rules of profitable investing. However, the weakest link in the chain is,
has been and always will be the investor himself. The investor would be well
advised not to fall prey to the belief that a better investment and/or trading
system will make you a better investor. The world's best investment or trading
system in the hands of an incompetent, undisciplined and unsophisticated
investor will prove to be a vehicle for consistent losses and disaster. It does not
matter how good your investment or trading system is, as it is you and only you
who can make that system work as it is intended to. To put it into perspective, "It
is not the gun that counts, but the man holding that gun".
Consider an investment or trading system that is so profitable that it makes
thousands in a short period of time. Now, consider a period of "drawdown",
which is a necessary part of the system. This drawdown is what really makes or
breaks an investment or trading system.
If the investor were to limit the drawdown to what they should be, based on the
trading signals generated by the system, then the system would recoup and move
on to bigger and better things. On the other hand, if the investor is undisciplined
and unwilling to accept losses when they should be taken according to the
system; then the drawdown period will either be longer than intended. Further,
the investment or trading system would deteriorate because of the investors lack
of action.
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Thus, the ability of an investor to cope with such periods of drawdown and paper
losses will either make or break a system. No matter how good the system is, the
investor himself is the weakest link in the chain. This lack of action on the part of
the investor will break the back of the system and of the investor himself quicker
that any unexpected adverse market event. At this point the psychology of the
investor becomes most important; and attitudes, behavior, perceptions and
experience become important factors for success.
Finally, by correctly applying experience and coping with losses, the investor will
either make or break the investment or trading system. There is no
predetermined formula to deal with such adverse situations, but there are
methods and procedures to minimize the degree of investor error; or in other
words to maximize dependence on the investor's response style.
Short-cut to learning: You can learn the various aspects and elements of
successful investing in many ways.
You may undergo a long drawn psychiatric treatment that may or may not
have the desired result.
You could enroll in a success motivation course that may be of some help.
You can read extensively about investment theory and practice; and
develop your own system, which would include both method and
procedure.
You may read autobiographies of the great investors and speculators to
reinforce your investment or trading system.
You could also undertake a course to discover the perfect investment or
trading system for yourself, only to discover later that it does not suit your
style.
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Whichever way you look at it, your focus should be on technique and investor
psychology, as against market methodology or investment system which are
secondary. A good investment or trading system is only 20% of the input for
success. The rest of the 80% would include the following:
Effective risk management tools.
A positive mental attitude.
A personal investor style or psychology.
Discipline and structure.
Consistency and persistence.
Visualize, recognize and act: To win the war as opposed to winning one
brief battle, you need to think, see and do; as has already been brought to
your attention above. "You need to visualize opportunities, recognize them
when they appear and most of all, consistently act on them once they present
themselves".
Winning attitudes and behavior: Every signal generated by your investment or
trading system must be considered to be the signal that will produce a vast
fortune. If however, you do not look upon each investing opportunity as a
significant opportunity for profit, then you would allow yourself the liberty to be
dissuaded from acting on the opportunity.
No individual or course or tape or lecture or article can do for you what you can
do for yourself. To develop this winning attitude and behavior you have to work
with yourself and develop your skills by yourself with your own effort. However,
time is at a premium due to its limited availability, so you would have to be
selective in what you study and learn. You should focus on your personal growth
as an investor, with respect to various aspects to ensure that you become a
successful investor.
Every investor has several characteristics that combine to make them successful.
The degree of success depends on how well you can implement these and how
well your strategy works.
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The method investors have for selecting shares that they want in their portfolio is
arguably one of the most important areas of being a successful investor. For me
personally I have stuck to selecting shares that are leading ie blue chip companies,
whose price histories are in a long term uptrend and that are themselves doing
better than the market average.
The next vital component is the trading plan. This doesn’t need to be overly
complex. You just need to know what you will do if the share price goes up, down
or sideways. If you can cover these three things then you have a contingency for
anything the share price can throw at you. And more importantly you will prevent
yourself from reacting to sudden market fluctuations that happen all of the time.
The trading plan should also incorporate an overall strategy for the share that you
have selected and explain the reasoning behind why you’re doing what you’re
doing ie why you decided to place your order level at this particular point.
You will need a robust risk management strategy and to be successful in the long
term you will need to implement the strategy. The number of times I’ve seen
people unwilling to action there risk management plan when the share price
reaches their pre-determined value price is a little bit scary.
The above three things are great to have in place but don’t forget that you must
be disciplined in implementing them otherwise you’re setting yourself up for
failure. And you should remember that to get good at anything you need to
practice and you need to gain experience. Champions are made in training. Not
on the track.
After identifying these strategic factors you should consider how much you are
willing to outlay on each share. It is important to try and spend the same amount
on each share ie $5000 across a portfolio of 10 shares in different industries in
order to maintain a balanced portfolio.
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Finally before deciding to go ahead with any investment you should asses
whether its risk to return is worth it. There is no point risking $1 to try to make 50
cents. Over my investing lifespan I have stuck with a ratio of 1:3. For every dollar
that I am risking I stand to make at least three or if I stand to make $3000 from a
trade then I am willing to risk $1000 in order to make it. The reasoning behind this
ratio is that no matter how good you are you will always loose in some of your
investments. Having a ratio like this ensures that when the of the investments pay
off they more than compensate for any that lose.
To recap any successful investor must exhibit these characteristics over the long
term.
Take responsibility for themselves and make their own decisions. They take the
credit for making profit and accept the responsibility for any losses. They learn
from these decisions and improve over time;
Make investment or trading plans and stick to them They make trading plans
based on reliable information in the clear calm light of day and not emotional
reactions that may emanate from the panic or euphoria of the share market. And,
they stick to their plan;
Assess the Risk/Return Ratio of each trade They only enter into investments that
offer reasonable potential for profit;
Manage the risk of every investment. And never lose too much;
Allow for contingencies in the plan so they know what they are going to do if the
share being traded goes up, down or sideways in price. The share price can donothing else. But you can do what you planned. The plan then dictates the actions
and prevents unprofitable emotional reactions;
Only put their money into financially secure companies;
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Buy shares when they are cheap and sell those that are expensive relative to
their price trends;
Only trade in companies whose prices are in trending up;
Trade unemotionally and have the discipline to trade the plan. They plan the
trade and trade the plan;
Keep taking money out of the market. You only make money when you sell
shares; and
Have sufficient confidence that has been gained from experience.
The game of investment as any other game requires certain qualities and virtues
on the part of the investor to be successful in the long run. What are these
qualities? While the lists prescribed by various commentators tend to vary, the
following qualities are found on most of the lists.
1. Contrary thinking
2. Patience
3. Composure
4. Flexibility and openness
5. Decisiveness
Before we dwell qualities point needs to be emphasized. Cultivating these
qualities distinctly improves the odds of superior performance but does not
guarantee it.
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Traits of the Great Masters:
The strategies employed by great masters (investors) based on analysis is
prepared and given under considering the most common traits:
1. He is realistic
2. He is intelligent to the point of genius
3. He is utterly dedicated to his craft
4. He is disciplined and patient
5. He is a loner
Contrary Thinking:
Investors tend to have a herd mentality follow the crowd. Two factors explain this
behavior. First, there is a natural desire on the part of human beings to be a partof a group. Second, in a complex field like investment most people do not have
enough confidence in their own judgment. This compels them to substitute others
opinion for their own.
Following the crowd behavior however often produces poor investment results.
Why? If everyone fancies a certain share, it soon becomes overpriced. Thanks to
bandwagon psychology, it is likely teaming bullish for a period longer than what is
rationally justifiable. However this cannot persist indefinitely because sooner or
later the market corrects itself. And when that happens the market price falls,sometimes very abruptly and sharply causing widespread losses.
Given the risks of imitating others and joining the crowd, you must cultivate the
habit of contrary thinking. It may be difficult to do because it is so tempting and
convenient to fail in line with others. Perhaps the best way to resist such a
tendency is to recognize that investment requires a different mode of thinking
than what is appropriate to everyday living.
Being a joiner is fine it comes to team sports, fashionable clothes, and trendyrestaurants. When it comes to investing, however the investor must remain aloof
and suppress social tendencies. When it comes to making money and keeping it,
the majority is always wrong.
The suggestion to cultivate contrary thinking should not, of course be literally
interpreted the means that you should always go against the prevailing market
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sentiment. If you do so, will miss many opportunities presented by the market
swings. A more sensible interpretation of the contrarian philosophy is this: go
with the market during incipient and intermediate phases of bullishness and
bearishness but go against the market when it moves towards the extremes.
Here are some suggestions to help cultivate the contrary approach to investment:
1. Avoid stocks which have a high price-earnings ratio. A high relative price –
earnings ratio reflects that the stock is very popular with investors.
2. Recognize that in the world of investments, many people have the temptation
to play the wrong game.
3. Sell the optimists and buy from the pessimists. While the former hope that the
future will be marvelous the latter fear that it will be awful. Reality often lies
somewhere in between. So it is good investment policy to bet against the two
extremes.
More specifically, remember the following rules which are helpful in
implementing the contrary approach:
Discipline your buying and selling by specifying the target pieces at which you will
buy and sell. Don’t try overzealously to buy when the market is at its nadir or sell
when the market is at its peak (these can often be known only with wisdom of
hindsight). Remember the advice of Baron Rothschild when he said that he would
leave the 20 percent gains at the top as well as at the bottom for others as hisinterest was only on the 60 percent profit in the middle.
Never look back after a sale or purchase to ask whether you should have waited.
It is pointless to wonder whether you could have bought a share for Rs 10 less or
sold it for Rs 20 more. What is important is that you buy at a price which will
ensure profit and sell at a price where you realize your expected profit
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Qualities of successful stocksWhat are the qualities that successful stocks of excellent businesses make them
apart from other stocks? What separates the good stock from the ordinary stock?
The answer is not simple. You should do proper research to find out why
particular stocks click in the stock market and why certain stocks do not click.
Financial analysis does play an important role but certain other factors are equally
important.
A leader is not born he is made. This saying goes well with stocks too. A leader in
the market is created mainly be consumers. It is the consumer who holds the key
to the lock (share). The market should accept a particular company and its
product to survive and sustain competition in this fast moving world.
The first and foremost question to be asked is whether the company’s productsand services are needed tomorrow. A company may be a leader in a particular
product in the market today but will that product survive tough competition and
will it last the next few years. Technology and science is changing before we blink
our eyes and so companies should adopt products and services that will not fade
away i.e. will sustain any market conditions.
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A decade ago who would have ever imagined that cassettes and VCR’s would
become extinct and would pave way to DVD’s and CD’s. The television is also
seeing a major revolution and the slim TV is gaining importance. PC’s are replaced
by LAPTOPS. Companies should have products and services which can adapt to
the changing needs of the consumer.
Very strong competitive advantages safeguard strong companies from
competitors. A popular trademark, high cost of entry and heavy manufacturing
costs are some reasons why companies stand out during tough times.
Market leadership is one of the greatest factors which determine a company’s
share in the market. Market leaders are followed by the others in the industry.
But don’t only rely only on market leaders. Some companies grow slowly and lose
their leadership tag and this brings their share price down. Market leaders have tobe prompt in decisions and should not let competitors overtake them, as once
strong ground is lost; it is very difficult to get back to number one position.
Although financial status and positions hold the first preference in determining
the trait of a company and its shares, there are various other factors like that the
ones mentioned above which determine the quality of a company’s share. So you
should be very careful while picking up stocks of major companies.
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