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Investing

Thought Of The Day: The Three Ways To Get Rich

As I see it, there are 3 ways to get rich; These are: by getting lucky, by starting a business or by investing.

Getting Rich By Luck

There’s luck in everything we do, whether it’s in business, investing, or any other part of live. But this way to get rich by luck refers to things like lottery wins or being born rich. This isn’t a valid strategy to make yourself rich, and if it were, it would be mega risky and really fast (assuming you were lucky straight away). Clearly gambling is not a strategy for getting rich that you should consider.

Getting Rich By Creating A Business

This method is more work that getting lucky. In fact, I would say that creating a business is the most work of the three ways to get rich. I would say that it’s medium risk (less risky than gambling, but more risky than investing) because compared to investing, you have all your eggs in one basket (in terms of money and time). The benefit to starting your own business (as a strategy to get rich) is that it’s a faster way to get rich than investing. When you consider that luck isn’t a strategy, I would say that creating a business is the fastest way to get rich.

Getting Rich By Investing

Finally, this is the slowest way to get rich, but it’s also the most reliable and least work (excluding getting lucky, which isn’t really a strategy to get rich). This is good news because anyone with a regular job can become an investor, which means than anyone can become rich with time.

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Investing

Thought Of The Day: Investors Don’t Care About Their Buy Price, But Traders Do

It is often said that investors don’t care about the buy price of a share, but traders do. This is an interesting sentence, because of course everyone cares what price they pay for shares. Today I thought I’d have a go at explaining the meaning behind this adage.

Clearly, investors care about their buy price, because if the buy price is too high, the stock isn’t worth buying. The difference comes down behaviour around the small price fluctuations. A trader might try to buy at the bottom of the range of fluctuation, then sell on the higher ends of the current valuation range. For example, if a stock is worth between $1.20 and $1.30, a trader might buy at $1.20, then sell at $1.30. Their profit is small, but they are able to repeat this several times a day to make a large profit.

On the other hand, an investor doesn’t care so much about the small fluctuations. They would prefer to buy at $1.20, but would be willing to buy at $1.30. They may then later sell at $4.00 some years later, so the $0.10 difference in buy price might only equate to a few percent difference in the final value of their stock when they sell.

While this might be thousands of dollars difference for the investor, this is the opportunity cost of being able to invest. I’m sure many investors will have a story where they have missed out on buying a stock due to chasing the price up because they were trying to get in at the lowest price.

Because of this, an investor is more likely to be willing to pay a higher price for stocks than a trader; hence the adage that investors don’t care about their buy price, but traders do.

The take-away from this is that if you are an investor, so long as you buy at a price that you think the stock is worth, it doesn’t matter if the share price drops after your purchase, so long as the company performs as you expected it to. That said, the possible exception to this is if your exit strategy relates to market sentiment, rather than dividends (one of the reasons that I don’t like Multiples of Revenue, and Comparables Market valuations).

The good thing about this type of investing is that (barring black swan events and times of raging bulls where everything’s overpriced for extended periods of time) investors should be able to sleep better at night because no matter what happens to the price, you know that you didn’t pay too much if you bought at a price where you saw value. I think this is an important factor, especially if you are relying on dividend income for your retirement or lifestyle.

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Investing

Thought Of The Day: Could Financial Stimulus Cause Inflation?

Today I’ve been thinking about all the financial stimulus going on around the world. There is a tremendous amount of money being “printed” around the world. Will all this financial stimulus cause inflation? If so, where is the best place to put your money?

Barring any recessionary effects, I wonder if a good thing to be investing in could be property and other finite assets that do well during inflationary environments. Another thing supporting the property outlook is the low interest rates that are available currently.

Perhaps I’ll do some analysis on REITs, retirement villages and other listed options that suit this strategy. If there’s anything that takes your fancy that you’d like me to analyse, or any opinions / tips you’d like to share, please leave a message in the comments below.

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Business

Thought Of The Day: Netflix

Netflix have an interesting business model. From the outset, you might think that their business is all about having the best shows to get all the customers, but they’ve found a more profitable way. They make shows, run them for a bit to prove their success, make money on them, then sell them to other providers.

This seems counter-intuitive at first, because why sell the golden goose and give a competitor a chance? Well, the answer to that lies in the sale price. If they can sell the shows for (say) 10 times the annual revenue the show would generate, then they can use that money to make more shows and end up with more money than they otherwise would have earned from just running the show themselves. This way both the competitor (who invests free cash into an asset that returns 10% ROCE) and Netflix who end up earning more money.

This model is not dissimilar from business owners selling their business. If you’ve built up a successful business, you should probably consider selling it and trying something new. Alternatively, perhaps you can sell part of your business (or shares in your business) like Netflix are doing by selling their shows and listing on the stock exchange, so you can use funds to invest in growth and make your business more successful.