How to Invest Money Smartly

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    13-Jan-2016

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How to Invest Money Smartly

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  • 1How to Invest Money Smartly

    Doing the same thing over and over and expecting

    different results.

    Einsteins definition of Insanity

    Describe an Ideal Investment

    Give me the highest possible return with the least amount of RISK!!!

  • 2Understanding the Investment Funnel

    1. Private deal

    2. Bank-IPO

    3. Stocks/Bonds

    4. Mutual Funds

    5. GICs/Savings

    6. General Public

    Most People are investing at the bottom of the chain

    Understanding the Investment Funnel

    Every Investment Opportunity starts as a private deal. This is where the most money is made.

    After the business is developed, the capitalists approach a bank to issue an IPO (initial public offering). The company is often split into a Bond

    offering and a Public Stock offering.

    Understanding the Investment Funnel

    Next step is to sell the Stock on the Stock Exchange (i.e.. TSX). This is where the general public gets the access to

    the shares of the business.

    After the stock has been trading on the Stock Exchange, various Mutual Funds start buying the stock for the Mutual Funds investors. This is where the majority of the general public buys a

    piece of the company.

  • 3Understanding the Investment Funnel

    The Banks go a step further with GICs and Saving accounts. Typical GIC gets locked for 3-5 yrs at the rate

    of 2 - 4%. These funds are used to earn significantly

    higher returns lending money often at the credit card interest rate levels.

    Dismantling the Risk /Return Dilemma

    Does high return always mean high risk? Lets think of a high profile entrepreneur.

    Many of the high profile entrepreneurs make money out of thin air. How?

    Because of their know how, people are willing to invest into their ventures

    What is the rate of return to the entrepreneur?

    Dismantling the Risk /Return Dilemma

    High Risk doesnt have to mean High Return and vice versa, High Return doesnt have to be High Risk.

    Its important to understand and calculate the Risk

    The problem is, it involves some work, while for most people its easier to embrace the herd mentality, and sit back.

  • 4Risk comes with Speculation

    Speculation is where the majority of the investment risk is, if we remove speculation we reduce the risk significantly.

    A question: where is the stock market going to be in the next 2 months? Would you like to bet?

    Posing the above question puts us in a position to bet which means that we speculate.

    The nature of the stock market is speculation.

    Risk comes with Speculation

    Most people invest their money in the stock market speculating rather than investing

    Lets look at an example of the largest U.S. IPO: VISA (March 2008) The shares were sold for $44 When the shares hit the general market the price was

    about $60, and in a short few days reached $88. Has the profitability of the company doubled over a

    few days? No! However, many investors speculated or gambled on the price of the shares, not on the profitability of the company.

    Stock price eventually dropped down back to $40s)

    Point of maximum financial risk

    Point of maximum financial opportunity

    Temporary setback. Im a

    long-term investor.

    Maybe the markets just arent for me.

    Fear

    I knew it was agreat investment.Hope

    Greed

    Wow, I feel great about this investment.

    $

    $

    The Emotions of Investing

    9

  • 5How about Mutual Funds

    How many mutual funds are there offered to Canadians?

    There are more Mutual Funds on the Canadian stock markets than the stocks these funds are investing in. (currently over 10,000 funds.)

    How about Mutual Funds

    Which funds are the best? Depends on who you Ask:

    The Forbes magazine will tell you one story The Money magazine will tell you another story Yet the Kiplingers will tell you a very different story!

    The difference in selection comes from the personal perspective of the editor Sponsorship also plays an important role as well (i.e.

    Power Corp)

    Mutual Fund Fees

    Mutual Funds have fees. The annual fees are called MER (Management

    Expense Ratio) Back End charges are called DSC

    All funds have fees, even the so called No Load Funds or Low Load Funds.

    Average fund fees are in the range of 2%-2.5% Index Funds have the lowest fees (

  • 6Monkey Portfolio

    Illustration:

    What to Expect from the markets in the near future?

    Watch for the next downturn caused by Alt-A and Option ARMS mortgages

    Expected default rate of 70% Estimated 8 million families will be

    foreclosed in the next 4 years. http://www.cbsnews.com/stories/2008/12/12/60minutes/main4666112.shtml

  • 7So, Should you put all your money into the mattress?

    Emphatically - NO! If we are not to put our money into the

    mattress, how do we invest than? Good investing involves doing some

    homework. Lots of money could be made even if the

    economy is sluggish. There are Many Investment Opportunities.

    Many Investment Opportunities

    Learn from Warren Buffet: He did not become rich by buying stocks, but by

    investing his money into various businesses. He only buys businesses that he understands He didnt buy technology stocks back in the 90s

    because he did not understand how they operate and make money , that saved his skin.

    Invest with the primary focus on the profitability of the business, not on speculation.

    Take the speculation out of your investments.

    How to Invest

    There are many high quality income based investments.

    Focus on profitability payouts (Dividend payments)

    Utility stocks: They are generally regarded as ultra-safe, if a little on the dull side. Most pay steady dividends.

    Infrastructure stocks: Billions of tax dollars spent on roads, bridges and power lines, some infrastructure stocks may hold value in soft markets.

  • 8Focus on Private Equity Investments There are many excellent Private Equity

    Investments. Profitability is significantly higher than Stock

    Markets. If proper due diligence done, speculation is

    completely removed from the equation. It focuses on the profits from underlying

    business. Example: Alberta based oil wells, many pump out oil

    at the cost of under $20, as long as the oil price is in the $50+ range the profitability is there. Its important to make sure it pays regularly. Oil wells based investments pay annually 20-30%. Investment minimums start at about $10,000.

    Focus on Private Equity Investments

    If you open Business section of, say, Edmonton Journal you will see some private investment firms advertising cash flow returns in range of 10%.

    Could be good opportunities, however doing the due diligence is of the utmost importance.

    Make sure that you understand how the money is earned, and also that youre comfortable with it.

    Examples:

    Real Estate based Asset Investments Land Investments Commercial Real Estate developments Strip Malls etc.

    Life Settlements Commercial Mortgages Fractions of Oil Wells

  • 9Important:

    Invest in a solid asset Protect yourself from inflation Do the due diligence Consult someone who understands the

    particular industry Diversify:

    Businesses or Stocks (be and owner) Bonds or Mortgages (be a lender) Real Estate or Land (be a holder) Gold or Cash (be ready for an opportunity)

    Becoming a Venture Capitalist

    Becoming a Venture Capitalist is not hard, however it requires from you to assume the responsibility for you own financial affairs.

    It is not convenient, but it puts you in the driver seat.

    It will empower you, and give you a great reward.

    It will bring you closer to your money Good Luck and Fare Well.