Download pdf - How to Invest Money Smartly

7/18/2019 How to Invest Money Smartly

http://slidepdf.com/reader/full/how-to-invest-money-smartly 1/9

How to Invest Money Smartly

“ Doing the same thing over

and over and expecting

different results.”

Einstein’s definition of “ Insanity”

Describe an Ideal Investment

• Give me the highest possible return with

the least amount of RISK!!!



Understanding 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


• Every Investment Opportunity starts as aprivate “deal”.

– This is where the most money is made.

• After the business is developed, thecapitalists approach a bank to issue anIPO (initial public offering).

– The company is often split into a Bondoffering and a Public Stock offering.


• Next step is to sell the Stock on the StockExchange (i.e.. TSX).

– This is where the general public gets the access tothe shares of the business.

• After the stock has been trading on the StockExchange, various Mutual Funds start buyingthe stock for the Mutual Funds’ investors.

– This is where the majority of the general public buys apiece of the company.




• The Banks go a step further with GICs andSaving accounts.

– Typical GIC gets locked for 3-5 yrs at the rateof 2 - 4%.

– These funds are used to earn significantlyhigher returns lending money often at thecredit card interest rate levels.

Dismantling the Risk /Return Dilemma

• Does high return always mean high risk?

• Let’s think of a high profile entrepreneur.

– Many of the high profile entrepreneurs makemoney “out of thin air”. How?

– Because of their know how, people are willingto invest into their ventures…

• What is the rate of return to theentrepreneur?

Dismantling the Risk /Return Dilemma

• High Risk doesn’t have to mean HighReturn and vice versa, High Returndoesn’t have to be High Risk.

• It’s important to understand and calculatethe “Risk”

• The problem is, it involves some work,while for most people it’s easier toembrace the herd mentality, and sit back.



Risk comes with Speculation

• Speculation is where the majority of theinvestment 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 positionto “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 stockmarket “speculating” rather than “investing”

• Let’s 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 wasabout $60, and in a short few days reached $88.

– Has the profitability of the company doubled over afew days? No! However, many investors speculatedor gambled on the price of the shares, not on theprofitability of the company.

– Stock price eventually dropped down back to $40s)

Point of maximumfinancial risk

Point of maximumfinancial opportunity

“Temporarysetback. I’m a

long-term investor.”

“Maybe the markets just aren’t for me.”

Fear

“I knew it was agreat investment.”Hope

Greed

“Wow, I feel greatabout this investment.”

$

$

The Emotions of Investing

9



How about Mutual Funds

• How many mutual funds are there offeredto Canadians?

• There are more Mutual Funds on theCanadian stock markets than the stocksthese funds are investing in. (currentlyover 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 Kiplinger’s will tell you a very different story!

• The difference in selection comes from thepersonal 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 LoadFunds” or “Low Load Funds”.

• Average fund fees are in the range of 2%-2.5%• Index Funds have the lowest fees (<1%)• Only about 20% of funds do better than the

stock market in general.• However, Mutual Funds are a convenient way to

invest.



Monkey Portfolio

• Illustration:

What to Expect from the markets in thenear future?

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

• Expected default rate of 70%

• Estimated 8 million families will beforeclosed in the next 4 years. – http://www.cbsnews.com/stories/2008/12/12/60minutes/main4666112.shtml



So, Should you put all your money intothe mattress?

• Emphatically - NO!

• If we are not to put our money into themattress, how do we invest than?

• Good investing involves doing somehomework.

• Lot’s of money could be made even if theeconomy is sluggish.

• There are Many Investment Opportunities.

Many Investment Opportunities

• Learn from Warren Buffet:

– He did not become rich by buying stocks, but byinvesting his money into various businesses.

– He only buys businesses that he understands

– He didn’t buy technology stocks back in the 90’sbecause he did not understand how they operate andmake 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 basedinvestments.

• Focus on profitability payouts (Dividendpayments)

• Utility stocks: They are generally regarded asultra-safe, if a little on the dull side. Most paysteady dividends.

• Infrastructure stocks: Billions of tax dollars spenton roads, bridges and power l ines, someinfrastructure stocks may hold value in softmarkets.



Focus on Private Equity Investments

• There are many excellent Private EquityInvestments.

• Profitability is significantly higher than StockMarkets.

• If proper due diligence done, speculation iscompletely removed from the equation.

• It focuses on the profits from underlyingbusiness. – Example: Alberta based oil wells, many pump out oil

at the cost of under $20, as long as the oil price is inthe $50+ range the profitability is there. It’s importantto make sure it pays regularly. Oil wells basedinvestments pay annually 20-30%. Investmentminimums start at about $10,000.

Focus on Private Equity Investments

• If you open “Business” section of, say,Edmonton Journal you will see someprivate investment firms advertising cashflow returns in range of 10%.

• Could be good opportunities, howeverdoing the due diligence is of the utmostimportance.

• Make sure that you understand how themoney is earned, and also that you’recomfortable 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



Important:

• Invest in a solid asset

• Protect yourself from inflation

• Do the due diligence

• Consult someone who understands theparticular 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 theresponsibility for you own financial affairs.

• It is not convenient, but it puts you in the driverseat.

• It will empower you, and give you a greatreward.

• It will bring you closer to your money

• Good Luck and Fare Well.