#2.) The Preliminaries Of Investing

Why exactly do we get jobs in the first place?

Let’s flash back to your mid-teen years when you got your first job. You wanted that job because the money that came with it gave you a sense of responsibility and it helped crack open a case of freedom for you, right? Of course that’s what it did for you! Maybe you didn’t realize it at the time, but you were converting your time into money. You were saying to yourself that my time is better spent working at this job than it was to be anywhere else. Do you know what is symbolic of that choice you made? You just discovered opportunity cost.

Opportunity cost is exactly what it sounds like; the cost of an opportunity. Instead of maybe playing video games or hanging out with friends, you weighed the cost of that choice to going out and making money. Making that choice was your first step towards financial success. Fast forward a few months from your first day on the job, and you have a sizable amount of money for a teen. You wanted to save your money and use it to buy a car or pay for something right? We all wanted that job because it meant we could get something we never had before. Within this understanding, you may not have realized what that piece of paper said about you or said about itself. You know that one dollar equals one dollar and accumulating enough of it puts you closer towards your spending goal. If I have one dollar, and gas cost $3, I have to work in order to get a full tank of gas. You do the math and realize that getting paid $9 an hour means that working 4 hours will be enough to fill your tank. But exactly why does the money you earn hold this value in the first place? We mostly don’t care about this part of making money because obtaining it is the primary goal. Understanding exactly what our money is and why it is worth what it is will either make or break you as an investor.

Since 1973, our money stood on its own. It is NOT tied to gold anymore.

Close-up of Text1973 was the year that the Bretton Woods Agreement ended. For the United States, this meant that our money was no longer tied to an underlying store of wealth. Our money is based purely on what people think it’s worth. I couldn’t believe it either and I honestly didn’t understand why this was so important. The main take away from this idea is that this is how all investments are structured. So for example, the reason why the United States has been such a power house in recent years is because everyone wanted our money. It is basic supply and demand. The more people who want what we have, the more they are willing to pay for it. If someone from the UK wanted to get USD, they would have to convert their money into USD. During that process, their money may buy less USD than what they were expecting. This concept gets really deep really quick into inflation and parts of economics I am not going to explain but just keep this in mind; everyone wants our money. (Not to confuse you) We are the gold standard when it comes to money. Now that our money is no longer tied to that underlying wealth, it is purely worth what someone is willing to pay for it. So if we continue to strive for great things in this nation and keep a dominant stride, our money will continue to be on top. If we stop plowing along for one second, that value may collapse.

USD and almost all the currencies in the world are what we call fiat currency. Meaning they are worth as much as what people believe they are worth. To tie this into the job you got back in your teen years, the reason why your money was worth what it was is because everyone believes that it commands that value.

Looking at publicly traded companies, you’ll find that valuing them is a balancing act between technical and fundamental analysis. The underlying business may be solid and is turning a profit, but everyone is paying less than what it should be worth. Do you follow what they do and avoid the company? Or do you take the risk and buy? This is a question I will answer in another post, because so much hinges on those questions.

As an individual, you are on the end of this money value debacle and what should matter is what money means to you. Simply put, money is a capture of time and power of your efforts. The more money you have, the larger your abilities are to command time and energy. So if you use your money to buy material items, how does this better command your time and energy? If anything, when we waste our money on material things that do not create wealth for us, we are wasting time. Time is something we can not create or get back. Time is valuable and is intertwined with increasing your wealth.

Imagine you own a plantation

Houses in Farm Against Cloudy SkyThere are 100 farm hands who live on your plantation who work for you, absolutely free. Your land seems to stretch for miles, ready to be cultivated. No I’m not talking about slave labor, I am talking about people who you have convinced to work for you for free. Whatever it is that you need them for, they will work for you. How nice does that sound? A whole work force devoted to working for you, 100% free. Can you picture what your operation is going to look like? Do you think that will never happen to you? Think again. Every dollar you earn that you invest is working for you. On your plantation of success, every dollar you commit to it is working in favor of you, in the process of making more money. Picture how big and expansive your money fields are with your George Washington farm hands (one dollar bills) planting your seeds of success. When you invest in anything, you are committing your hard-earned money towards making you more money or more workers. The more workers you have, the more money you can make. Having these workers is what compounding interest is about, and if you don’t know what that is, stop right now and google it. But please come back and keep reading after you’ve googled it. You’re gonna miss something big if you don’t.

This is not an idea of my own, but the analogy is. The simple idea that you turn your money towards working for you is that of Robert Kiyosaki, a Hawaiian who is what I like to consider a 21st century money expert. In his book Rich Dad Poor Dad, Robert makes a stark comparison between habits of the middle class and the rich. He does this by explaining the mindset of his real dad (poor dad) and that of his friend’s dad (rich dad). This book is what I consider the baseline for personal wealth development and is a really easy read. I plan on having a give away for this book so you can snag your very own copy FOR FREE or you can buy it now from our affiliate link for a couple of dollars. I know that for what this book is worth, a few dollars is a very small price to pay for a life time of knowledge and wealth creation.

Robert has many other books for sale, and I will cover them later and will show you how they fit into all of this. But Rich Dad Poor Dad has one idea in it that I believe to be the pinnacle of creating financial freedom and wealth for yourself. In terms of personal finance, he describes this ground breaking idea like this. On page 67 of his book, Robert explains: “If you want to be rich, simply spend your life buying assets. If you want to be poor or middle class, spend your life buying liabilities”.

In my own desire to build wealth, I realized how important those two sentences are. Merely understanding the meaning of that sentence will make you rich and financially successful. There is so much more to learn from his book but for this entry I want to focus on those two sentences. All the rich do is buy assets, and then they use those assets to buy more assets because they understand the value of compounding interest. The poor and middle class spend their time buying things that won’t make them money and depreciate their worth. This is why the rich continue to get richer and the middle and lower classes stay where they are (Robert also mentions this in his book). The fundamental difference between the rich and the poor is that the rich have the mindset and the motivation to do better. They understand the value of investing their money and letting it work for them instead of limiting their money and giving it away to do work for someone else. The rich command a huge plantation of wealth, turning Washington into Benjamin again and again. The poor turn their hard-earned Washington worker into this month’s liability or unnecessary expense. There are unavoidable expenses that both sides have to deal with, but the poor continue to be poor because of the mindset they have set forth for themselves.

In essence, the middle class and poor have a mindset like this:

  • I like where I’m at, I don’t need more money
  • If I do need more money, I’ll just work harder for it

In essence, the rich have a mindset like this:

  • I will never be content with where I am until my financial security is guaranteed
  • I need to have my money work for me instead of working for more money

Whenever you clearly grasp the concept that obtaining assets is more important than liabilities, you are ready to secure your financial freedom. Do not let outside pressures force you into breaking this vow. Always pride yourself in being financially mature and buying the things that matter like assets. Play the long game, investing now may not be as exciting and gratifying as buying a brand new car, but in even in 10 to 15 years from now, the decision you made years ago will never come back to haunt you. The smart choice of buying assets, increasing your knowledge, and taking risk will be compounded beyond your wildest comprehension. I do want to point out that when you do reach this point of financial security (which is something you need to define for yourself, and don’t worry, Rich Dad Poor Dad will help define what that is) and have a massive asset base that pays for everything, you can then begin to think about obtaining luxuries.

Asset identification

The main problem that everyone has when going down this path towards obtaining assets is actually understanding what is an asset and something that is a liability. Making the distinction is largely helpful in making sure your money is well spent. The struggle to better understand what is an asset and what is a liability is a constant battle. Later on in my entries, I will go over defining what a good investment looks like in the stock market so you too can have a better understanding of asset building.

If all of what I just said sounds EXTREMELY appealing to you and has your money senses tingling, then it is time for us to move onto topic #3. This is where we get our action plan in place for investing. Prepare yourself because things are going to HEAT UP.

Disclaimer

These are generalizations and meant to increase your understanding of the securities market. Any advice contained within this blog is general advice and does not consider your objectives, financial situation or needs, and you should consider whether it’s appropriate for you. The information we are giving you is for educational purposes only.

“Investing is about understanding your risk” and every time you invest in the share market there is a risk of loss. Trading is not for everyone. There is a possibility that you can lose your money. You should only act on our recommendations if you are confident that you fully understand what you are doing.

Advertisements

One thought on “#2.) The Preliminaries Of Investing

Add yours

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

Blog at WordPress.com.

Up ↑

%d bloggers like this: