In contrary to common belief, investing money is not rocket science. It can become one, but so can everything else if one would decide to dig deep enough into details. So today I would like to debunk this general perception and give advise on a more healthy and valid approach on how to perceive and apply to investments in the stock or bond market.
It’s a common purchase and it’s easy
Let me start by saying this: Anybody can buy shares of a publicly listed company. If you know how to buy a book on eBay or Amazon, then you already have all the qualifications required to perform an investment purchase.
You do it online, from your mobile or laptop and all you need is an app from your bank or the website address.
In fact, the process is so easy that banks are obliged to check your experience levels and limit the available investment products based on your experience only to ensure that you actually not buy something that you wouldn’t want to have bought by pure accident. The procedure is usually a 4-step process:
- Login to your trading account
- Select the company you like to purchase shares of
- Type in the number of shares and click buy
- Re-confirm the purchase via a security code
Done. Your order will be submitted to the bank and unless you are the only one active on the computer in the world in a very specific non-liquid market, your order will be usually processed and confirmed before you can even click back to check your account status. Yes, there are some exceptions for certain very specific stocks, but that will be most certainly not a company that the average investor will have on his/her radar.
Risk of losing money
One of the most common arguments I hear about people not wanting to invest is due to the risk of losing money. Let me be clear: Yes, it can happen. But for myself, I have a simple analogy in place that re-assures me that I am in fact doing the right thing by investing.
Every purchase involves a loss of money and most of our regular purchases are actually a total loss.
When you buy a house or a car, it depreciates the moment you step a foot in. When you buy a book it loses value the moment you take it out of the shop and turn the first page. Clothes keep some value for a while but once they are out of trend, condition or worse, out of size, their value is basically down to zero. The worst are food and beverages. They generate a total loss within usually a few minutes. If you are a gourmet, less then an hour. I know, foodies might see it in a different way and if they Instagram it then there might be some value added, but for most cases, the value will disappear rather quickly. A very short time pleasure for a permanent loss of funds.
For someone with an investor mindset, investing is similar to shopping
Yes, investments may lose value even up to 100%. But so does every coffee and every pizza that you would swallow. However, many investments generate profits and in many cases, they do so for many years. Some even may do so for your entire lifetime and beyond. Without giving here a recommendation let me give a specific example:
One stock of Starbucks will pay you a little over 1 EUR a year in 2018 in the form of dividends. One share costs you almost 47 EUR today (27.3.2018). So by buying one share of Starbucks, you will start receiving payments until after 47 years you get the paid amount back. Provided the company still exists (not much of a doubt) and that the company keeps generating profits to pay the dividend (also not much of a doubt).
Now that sounds rather boring, but consider this: Starbucks is increasing its dividend by 10-20% year on year. So considering this, you might rightfully expect to get your 47 EUR back much earlier, maybe just 20-25 years. It takes some time, yes, but if you have another 60 or 70 years to live, then consider how much additional value it starts to create in every single year after that! If you still have 60 years to go and can get a return of your investment after 20 years, already, the remaining 40 years may offer you triple or quadruple your returns – while you still remain the owner of the shares with its individual value.
And Starbucks has in comparison a very low dividend. What if the company pays not 2.1% but 3, 4 or even 5% or more? What if the company doesn’t grow the dividend by 10-20% but by 30-40%? You might find yourself in the situation that the invested 47 EUR will come back to you within only 6 or 7 years and suddenly it starts paying for every cup of coffee that you enjoy daily.
No other purchase offers you this kind of opportunity. The best coffee and the best burger or pizza or avocado salad will be forgotten after a day or two and the money spent will be gone for good. But companies on the stock exchange are built to last and their sole and only purpose is to generate profits for its shareholders.
The “evil” shareholder
We all know the mantra: Big companies are a cohort of evil. They only chase for profits, don’t care about people and have no soul. The only thing that counts is black or dark green numbers. This is not entirely correct. These companies do care about people, but mostly about those who own them. The shareholders. And even more importantly, they hire a bunch of very well paid and smart other people whose sole purpose is to ensure that the company keeps generating more profits for years to come.
The true meaning here is: As a shareholder, those people work for you. You don’t need to start a business or buy a house, hire people, work on business plans, etc. to start generating income. You like a company and would like to benefit from its success, or have a say in the companies direction? Become a shareholder and buy the stock. You would like to start receiving rental income but lack the funds to buy a house and/or don’t want to take large loans? Buy a REIT (Real Estate Investment Trust).
Long-term plan versus short-term gratification
The other main takeaway here is, that investing is (and should be) a long-term plan that doesn’t involve material, instant gratification. When you drink a hot cup of coffee on a cold day, you feel the warmth, the caffeine brings your brain back to function and you get instantly the feeling of having done something good for yourself. When you buy a stock – well you most likely feel nothing. Even worse, your bank account drops and you got to wait long in comparison before you realize the significance and benefit of your purchase. But once recognized, it will serve you well for many years to come and you will start to enjoy and appreciate it in the long run.
Patience is the key.