How to Become a Better Investor? Why we invest money?
Have we ever thought to venture into investing for the sake of becoming a better investor?
Almost all of us want to invest money to multiply our money faster.
But how about changing our thinking a little?
Lets try to start investing to earn a tag of a better investor.
I know, lot of people are motivated to invest money because investment has potential to make more money for us.
But here, were are talking about altering our motivation.
The advantage of investing money for the sake of becoming a good investor is huge.
It cannot be quantified just in terms of money.
But this is also a fact that, a better investor can make more money than majority.
So let’s not race with anyone. Let’s not compare our investments with others.
Let’s invest our money to become a better and wiser investor.
More importantly, let’s forget the concept of ‘investing money to make more money’.
We will first focus on becoming a better investor.
Money will eventually follow.
It’s better to go back to school and open our drawing boards.
First learn the basics of investment.
People who know the basic rules of investing are better investors.
They also eventually make lots of money.
So here are few basic rules of investing.
Knowing these rules can transform an average person into a better investor.
#1. Generate streams of investment income
Investment income gives freedom. Paycheck increases dependency
When we do a job and earn a paycheck, this type of income is called a earned income.
A person who is making ONLY earned income is not investing.
When people start investing their money, they start generating streams of two additional forms of investment income.
Robert Kiyosaki refers those additional source of investment income as:
- (a) Portfolio income &
- (b) Passive income.
This is the most dominant form of investment income.
Earned income is used to buy securities like shares, mutual funds, bank deposits etc.
Together, all these securities makes an investment portfolio of the investors.
A typical investment portfolio is shown below:
Building streams of reliable portfolio income is the first step towards becoming a better investor.
Initially, when people just start to invest their money, portfolio income will be zero or negligible.
With my experience, I can say that for first 2-3 years, the portfolio income will be negligible.
But with time, this income will start to grow.
There are people whose portfolio income is almost comparable with their earned income.
Give yourself a target: in next 3 years your portfolio income should be at least 10% of your earned income from job.
Such goals not only push people to practice investment regularly, but it also creates a very visible BENEFIT of investing.
According to Robert Kiyosaki, this income has powers to transform an average person into a financially independent person.
Passive income can be generated from income generating assets.
Asset that generates the best form of passive income is real estate properties.
But so many people owns real estate properties these days, are they better investors?
Owning a real estate property is not enough.
People that we see buying multiple residential and commercial properties are doing this by taking home loans.
Real estate property bought by availing home loan is not an asset. Why?
Compare the EMI Paid and Rental income received/saved.
In 90% cases, the cash-flow will be negative.
EMI paid will be higher than the rental income.
So many people BUY real estate property, but on backdrop of huge home loans, the same property becomes a liability instead of an asset.
How to become a better investor?
Keep diverting a substantial portion of earned income to build an investment portfolio.
Let the investment portfolio grow bigger and generate more portfolio income.
Make it a point to reinvest all of the portfolio income.
When the investment portfolio is big enough, divert this money to buy a real estate property.
But make it a point that the home loan component is zero.
Keep repeating this cycle time and again.
Investing money like this will surely transform an average person into somebody wealthy.
This process of investing has such huge powers that by using this road, even a common man can become filthy rich.
#2. All investments will not make money
Before one actually starts to invest money, this realization is a must.
All investments will not make profits. Some will make lots of money.
Some investments will be average.
And some may even be loss-making investments.
It is on the investor to keep investing and deciphering good investments with loss-making ones.
The fear of loss-making investments should not stop one from investing.
Similarly, few good investments should not make one overconfident.
Now, this is really important because this is something that is not often spelt out about investment.
Investment is not only about buying shares, mutual funds etc.
There is one more important step.
It is investor’s responsibility to also do a periodic check of the portfolio.
Objective should be to evaluate and remove non-performing securities.
One must keep only those securities which are making money.
These money making securities are the asset of the investment portfolio.
#3. Learn to time the market
Buy more when others are selling. Sell more when others are buying. Ride against the crowd.
People often begin investing when they hear noises around them about prices going bull.
The price rise can be in stock market, in real estate or in gold.
These are the 3 main triggers that wakes up common men, and they start investing.
But this is the worst time to start investing. Let’s see how…
Today in BSE, the SENSEX is trading 31,500 levels. The Sensex has been bullish since last 8 months (Dec’2016).
Hence there is a lot of noise and commotion about stock market touching its all time highs.
These days even those people are investing in stocks who know nothing about stock market.
But wise investors would not put their money in market now.
These are times when it is hard to find a bargain stock.
Most stocks trade at overvalued price levels in these circumstances.
Hence this is not a time to buy stocks now.
There are enough hints that market is going to correct itself in next months.
So one must wait like a hawk for the market to fall.
I have given this analysis just as an example.
The point I am trying to make is this: it is considered wise to buy stocks only when others are selling them.
This will allow one to grab good stocks at undervalued price levels.
This is what is called timing the market.
Market does not always gives hints to time the market.
But in times like today (Aug’17), it is looking obvious that correction is around the corner.
It is always good to keep one’s eyes and ears’ open towards the market.
Investing blindfold will only increase the investment risks.
#4. Be informed…
Information is power. Awareness also works.
Keep your senses awake all the time.
If you are passionate about stock investing, keep yourself updated about what is happening in the market.
I am not asking you to read business newspapers every day front to back.
At least buy a money magazine every fortnight and read it all.
This will open your mind and you will be aware of what is happening around you.
One you develop some basic knowledge, start comparing facts of today with past.
How much profit a company made this year compared to last 3 years?
At what price gold is trading today compared to last year?
As compared to end of year 2016, where is Sensex trading today?
These questions and comparisons will give you a feel of the market trends and future probabilities.
I know, for a newbie my words may sound cloudy, but do not worry about wordings.
To become a better investor, just start reading from today.
Reading a magazine like Outlook Money, ET Wealth etc will work.
Do not stop after one or two reads. Make it a point that you are going to read it all for next 6 months at stretch.
Even after that do not stop. But the benefits of this hard work will begin to be visible from 6th month onwards.
#5. Experience counts…
In the world of investment, there is no better teacher than self-experience.
I have seen people who only read books about investing.
But when it comes to making hands dirty, they play safe.
They just do not invest.
For them, keeping money safe in bank account makes them confident.
These are same people who always think that yesterday was the better time to invest. Today market is overvalued.
These people have gathered so much theoretical knowledge that they become too skeptical.
The best balance is to study and practice.
Reading balance sheet of companies is good.
But this study will make sense if you go ahead also try your evaluation (buy some stocks).
In the initial days, there will be mistakes.
So my advice is, invest only small sums of money. Invest just for the sake of learning.
Soon a time will come when you will start getting the feel of investment.
You will start handling money better.
Some money will be parked in savings account. Few will go into deposits. Some will be used to buy company deposits.
Others will buy mutual funds through SIP.
Money will also be kept as savings in Gold. Simultaneously money will also buy some stocks.
Trying one’s hands in all of these investment options from day one must be avoided.
Keep listening to yourself. Invest only in those options in which you are comfortable.
With experience, the circumference of your comfort zone will also become wider.
Important is to invest. Gain experience. Learn from mistakes and then invest again.
When people invest money for the sake of making more money, results are often not what was desirable.
Hence the smarter alternative is to invest money to become a better investor.
Better investors eventually make more money.
For an ordinary people like me and you, investing is only about buying securities.
But all securities will not make money for us.
Good investor are one who invests regularly and evaluate.
He learns from his mistakes highlighted by the evaluation and invests again.
This learning process makes the person a better investor.
Knowledge, experience, and awareness of the market will transform ordinary men and make them a better investor.