How to invest money
"How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.
How to invest money?
What are the investment essentials?
1. Understand the importance of financial education
- Riches don't work for money, money work for them. That's the principle preached by Robert Kiyosaki in his book "Rich Dad, Poor Dad". Wealthy individuals challenge themselves, take risks and invest in financial literacy.
- Robert defines Financial Freedom as the moment when income from assets are greater than expenses, where most people are locked in a "rat race". Compare the diagrams below.
- Therefore to become financially free it's essential to invest in yourself, in your financial skills and take action towards your financial future.
2. Invest in value
- The Warren Buffet approach: he's simply one the richest individuals in the world with a clear strategy - investing in well known valuable companies and stick to them for the long term. Buffet's essential investment strategies and quotes are:
- Focus on value: 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
- Strong profitability: 'If a business does well, the stock eventually follows.
- Not too much in debt: 'Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.'
- Understanding the business: 'Risk comes from not knowing what you're doing.'
- Strong management: 'It's better to hang out with people better than you
- Long-term hold: 'Our favorite holding period is forever.'
- The 'Moat': 'Your premium brand had better be delivering something special, or it's not going to get the business.'
- Intelligent Investor: this book is Warren Buffet's investment bible. It's his favorite investment book, so it's worth reading it.
3. Have some basic rules
Historically some of the best financiers and investors in the world are Swiss. Max Gunther has compiled their basic investment rules in a book called "The Zurich Axioms". It's a great summary of the essential investment strategies and principles. You can find a summary below:
Zurich Axioms:
On Risk:
- Worry is not a sickness but a sign of health - if you are not worried, you are not risking enough.
- Always play for meaningful stakes - if an amount is so small that its loss won’t make any significant difference, then it isn’t likely to bring any significant gains either.
- Resist the allure of diversification.
On Greed:
- Always take your profit too soon.
- Decide in advance what gain you want from a venture, and when you get it, get out.
On Hope:
- When the ship starts sinking, don’t pray. Jump.
- Accept small losses cheerfully as a fact of life. Expect to experience several while awaiting a large gain.
On Forecasts:
- Human behavior cannot be predicted. Distrust anyone who claims to know the future, however dimly.
On Patterns:
- Chaos is not dangerous until it starts to look orderly.
- Beware the historian’s trap - it is based on the age-old but entirely unwarranted belief that the orderly repetition of history allows for accurate forecasting in certain situations.
- Beware the chartist’s illusion - it is characteristic of human minds to perceive links of cause and effect where none exist.
- Beware the gambler’s fallacy - there’s no such thing as "Today’s my lucky day" or "I’m hot tonight".
On Mobility:
- Avoid putting down roots. They impede motion.
- Do not become trapped in a souring venture because of sentiments like loyalty and nostalgia.
- Never hesitate to abandon a venture if something more attractive comes into view.
On Intuition:
- A hunch can be trusted if it can be explained.
- Never confuse a hunch with a hope.
On the Occult:
- If astrology worked, all astrologers would be rich.
- A superstition need not be exorcised. It can be enjoyed, provided it is kept in its place.
On Optimism & Pessimism:
- Optimism means expecting the best, but confidence mean knowing how you will handle the worst. Never make a move if you are merely optimistic.
On Consensus:
- Disregard the majority opinion. It is probably wrong.
- Never follow speculative fads. Often, the best time to buy something is when nobody else wants it.
On Stubbornness:
- If it doesn’t pay off the first time, forget it.
- Never try to save a bad investment by "averaging down".
On Planning:
- Long-range plans engender the dangerous belief that the future is under control. It is important never to take your own long-range plans or other people’s seriously. In essence these axioms point to the benefit of having an investment strategy and sticking to it, regardless of what other investors say or do. If you don’t have an investment strategy, you could do worse than adopt these principles. However, don’t be afraid to add or subtract ones according to what works for you.
Essentials on how to invest money:
- List: Essential top 10 books on money
- Book: Intelligent Investor by Benjamin Graham. Warren Buffet's investment bible. It's his favorite investment book, so it's worth reading it.
- Book: Rich Dad Poor Dad by Robert T. Kiyosaki.
