November 18, 2017

Principle of investing (I)

Introduction

In GTBAM education series published earlier, we presented a study on the “Art of Investing,” where investing was defined as an art and science that requires creativity, experience and good judgment on the art side and quantitative skills, precision on the science divide to achieve mastery of the process. (You can visit our website at www.gtbasset.com to read or download a copy of the article).

In this edition, we shall highlight the principles guiding investing in several spheres of the market. It is common knowledge that though many desire to invest and earn returns on their investment, they lack the requisite skill necessary for taking informed investment decisions.

The following are principles practiced by renowned investors drawn from around the world. They include:

Start now

Every form of delay in investing only increases the time it will take to accomplish an investment goal; be it saving for retirement, starting a building project, paying for children’s school fees, etc. Starting early makes all the difference, the longer you have your money working for you, the more you will gain. In general, every six years you wait doubles the required monthly savings to reach the same level of retirement income.

Know yourself

Knowledge of self is a cardinal requirement for investing. The course of action is dependent on current situation, future goals and personality. An investor’s financial health is made up of his net worth, monthly income, expenses, saving ability, among others.

In addition to having a documented investment plan, an investor must know his/her investment self. Investors can be defined as either active or passive investors and speculator or investors.

Active investors make a serious commitment in time and energy to become good investors who equate the quality and amount of hands-on research with the expected return. The equation “Work = Return” translates to the more work put into an investment, the higher the return should be.

Passive investors buy and hold securities with long-term horizon without actively trying to profit from short-term price fluctuations in the market. It requires good high quality initial research, patience and a well-diversified portfolio. Proponents of passive investing are regarded as true investors in the market.

A speculator’s sole concern is the value that someone will be willing to pay for an asset, while an investor looks at a stock as part of a business.

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