At the beginning of the New Millenium, the concept of investing, of “doing something" with your excess capital, has never been stronger. While this applies to citizens everywhere, nowhere has it hit home as much as in the U. S. where many of our clients live and do business.
Various “analysts" and “experts" have moaned that the savings rate of the U. S. citizen has gone negative. What they fail to understand. . . or choose to ignore. . . is that savings no longer represents anything in the United States. First, there is inflation, always understated by the government, usually by at least 50%, which uses various tricks and numbers games to convince the unwary that all is well. The value of savings is constantly going down.
Additionally, the American Internal Revenue Service has chosen to tax even the negligible rate of return on savings, actually punishing sound savers for doing so. The “market" has responded by pulling savings out of the banks and risking it on what is arguably one of the strangest bull markets in history.
But two questions come to mind: (1) Why should anyone invest? and (2) how should they go about it?
While we would not claim to have the definitive answers to either question, we feel we have enough background to at least offer some suggestions.
WHY DO IT AT ALL?
1. To get a better rate of return than one can get on bank savings.
2. To create a large enough egg to retire on without having to sacrifice your current quality of life, particularly if you happen to live longer than expected.
3. To provide for the ever growing cost of your children’s university educations.
4. To safeguard yourself should major illness strike.
5. To ensure that your spouse and children are not left destitute should you die.
6. To provide funds for travel, study, rest and recreation.
7. To pay off debts and obligations and to live as credit-free as possible.
8. To take full responsibility for your life and not rely on government doles, pensions and/or Social Security Systems should they fail, a distinct possibility in the future.
Here we’re going to explore a lot of possibilities. Some of the thoughts are ours; others came from sources whom we’ve come to both admire and respect. In any case, you’ll need to choose what works for you.
First, we believe you need to work out who you are as an investor. Much of what you do should be based on your own personality, knowledge and what makes you feel comfortable.
We suggest that you honestly evaluate the kind of person you are. Do you really like risk? Are you the kind of person who likes to plunk down $20 to $100 bets on impulse at the racing track or casino?
Or are you the kind of person who, 50 years ago, would have been exclusively into blue chips, utilties and similar “safe" investments, holding on for the long haul? And who, if he does visit a casino, plays quarter slot machines and avoids the expensive games?
Maybe you are a combination of these, wanting solid investments, but willing to take a risky flyer now and then?
Whatever the case, we feel you need to consciously recognize who you are as an investor, what kind of player you’ll be at the table, no matter in which country that table may be set up. (There is nothing “wrong" with being at one end of the spectrum or the other. One is not “better" than the other. ) The reason is simple: If you invest contrary to your nature, you are not going to be happy with your investment strategy nor will you sleep well.
If you’re strictly conservative, making a lot of high risk investments will leave you feeling out of control, nervous and very out of sorts. You won’t trust your choices, will trade emotionally, getting out of those which frighten you because of their volatility, just when you should be letting some of them ride. Or, worse, remaining in losers long after they should have been dumped, buying more of that stock on the downhill run, desperately trying to recoup your losses. Your emotions will seriously colour your choices, never a good investment method.
At the opposite end, if you’re risk taker, trading slow moving, stodgy and conservative stocks will leave you totally bored and unsatisfied with what you’re doing. You’ll miss the excitement of the game and will constantly be wanting to get out of the slow movers into something with more pizzaz, as the Americans put it.
So, to quote the old adages, “Know Thyself" and “To Thine Own Self Be True. " Only in this way will you find satisfaction, happiness and peace of mind.
Secondly, we believe you need to work out a philosophy of things in which to invest. Find areas of investment which interest you. If you understand energy issues, for instance, there are plenty of both high risk and conservative stocks and commodities in which to invest. You’ll enjoy continuing to study the field, happy that you are working with known values.
If you have a good background in technical or biomedical issues, you’ll be far more knowledgeable in your investment choices sticking to these areas.
One group which we’ve studied, relies on what they call “freedom" issues, companies which produce goods or services which empower individuals, which makes things either cheaper to buy or easier to use. They scour the world, willing to make investments anywhere they find solidly managed companies which are making a difference in the way we live, “freeing" us up to expand our lives. We find this particular philosophy a sound one. However, you may have an entirely different one which suits who you are and what you know. Keep to it.
Thirdly, you need to plan some constant study. Never before in the history of humankind has there been such a rate of change as we’re experiencing now. And the rate itself is increasing. What was sound six months ago is unworkable today, simply because some new technology has entered the picture. Old industries, once considered financially sound, are being overtaken by newer technologies. . . or being undercut by the same industries located in other countries with a far lower labor rate and materials cost.
Technology changes even the old. Robotics, really instituted by the Japanese whose “old" infrastructure was completely destroyed during WWII, almost totally overtook the American auto industry which was relying on 1930s technology in old and very outmoded factories. That particular US industry either had to change. . . or fold. They changed. Note, however, how that changed the fate of the autoworkers unions. They, too, had to adapt, to go with the new realities.
So you must keep constantly educated as to the newest developments in your field of interest. And no longer can you restrict your education to just what is happening in your own country. Changes and improvements in other countries will rapidly impinge on world markets. Keeping up with such changes is your best insurance that you’ll stay ahead of your investment game.
Fourthly, Learn to Think Globally! It would be difficult to overstate this critical strategy. Virtually all markets are now international. India, as an example, has some of the best computer programmers in the world. Their software products are world class. They can compete with anyone. And they do it at wages lower than most of the “developed" nations. If you’re investing in technologies and ignore the information and products coming out of India, you’re playing with a short deck.
Other countries, too, are growing in their competitive structures. Individuals, as never before, are acting as corporations, able to do business from anywhere in the world which connects to a modem. . . . or a satellite. Creative entrepreneurs, carrying six pound laptops, are complete businesses, able to compete with anyone, anywhere.
And Fifth, learn to adapt. Even if you’re a conservative, work to become used to the idea of being ready to change your game plan quickly when new information becomes available. Sticking with the old, which has already become outmoded even though it’s only a few years - or a few months - old, is a recipe for financial disaster. Think of being a chameleon, ready to shift to the new background while still maintaining your sense of who you are and how you best work.
We wish you happy and successful investing.
Mr. Eric Barnes is President & General Manager of Capital Funds Group Ltd. , a Canadian based consulting firm specializing in Putting Companies and Money Together. They also work with non-US companies to take them public rapidly and inexpensively, then getting them funded. Visit our Web Site Email Him