Ever tried reading a doctor’s prescription before? Am pretty sure your answer would be “Why Bother?” Even if it is stamped “Private & Confidential”, chances are that you will never be able to understand what is written in it. It is the same feeling some people get once you mention the word “Finance”. The moment they see an article with the words “Finance”, “Investment”, “Capital & Money Market”, their brains just switches off. It reminds me of my wife. A lawyer, gender specialist and an entrepreneur in her own right. Make the mistake of mentioning the words “Balance Sheet” in her presence and I can bet my dinner that you have lost her. Such is her capacity not to want to understand the concept.
If you are, by any chance, like my wife, then you are not alone. There are loads of people that think exactly the same way you do and are easily intimidated by big technical jargon associated with Finance. The feeling is indeed mutual. It was the reason why when I set out to write a personal finance book I titled “Honey, is it in the budget?” I made sure I wrote it in everyday language that the non-finance person can easily relate to. It was the reason I gave it that title in the first place so that people are not quickly turned off once they read the title.
Interestingly, when you peel away the technical jargon, Finance is actually easy to understand. Here is where it gets ironic. Everyone at some point in their lifetime would have to make a finance-related decision. Whether it relates to buying a property, taking a mortgage, or deciding whether to invest in a local business or put money in stocks. Allow me to take it a little further - The more realistic fact is that you have already made a finance-related decision today or just about making one all without even being aware that you are. Sometimes it could be as easy as deciding whether to stock household provisions for the month as against just for the week or the decision whether to buy that Christmas gift now when it will probably be cheaper or during Christmas when prices would be higher. The most critical decisions, however, which we typically remember, relate in particular to the subject of investment and this is where a lot of us either just switch off or pretend to know what we are doing when we basically do not. I have therefore outlined three basic hints which can help you in making sound investment decisions. Read and thank me later.
1. Never invest in products you can’t explain to a 7-year-old – This sounds funny I know, but I’m dead serious. The import here is not about the ability of a 7-year-old to decide whether an investment is good or bad but the fact that the investment product itself is so clear to you and simple to understand such that you can easily explain it to a 7-year-old and the child would understand. There is a reason banks, investment companies, insurance and real estate firms employ fast-talking guys and pretty ladies to do their marketing runs. Chances are that these professional marketers can sweet talk you or, at the very least, distract you into going for an investment you least understand. Some people, for the sake of not wanting to sound stupid, don’t ask questions, but if you don’t ask, there is the likelihood you will be ill or misinformed.
So learn to ask the right questions even if they sound “stupid” and in the event the answer is not clear, ask a follow-up question. A young man once came to me to find out what “Mutual funds” were all about AFTER he had committed his funds to invest in them. Don’t be ashamed of asking stupid questions, even if there is a pretty girl or hot dude at the other end of the table. Remember what we said in an earlier article – YOUR SHAME IS IN YOUR POCKET. KEEP IT THERE.
2. If it is too good to be true, then it is too good to be true – Ever heard of an investment option that can double your cash within one month or one that can earn you 100% returns within one year? Yeah! I know you have and maybe you have even been a victim of some of the many Ponzi Scheme out there. Listen! The only investment today that has the “potential” of giving you 100% return in a relatively short period of time is the Stock Exchange Market and digital currencies. In the same way it promises 100% returns when there is a boom, it can also give you a 100% loss during a bust. Such is the risk involved. There is no other investment today that can GUARANTEE you a 100% return in one year. Even the stock exchange is spoken of in terms of potential and not guarantees. So if anybody comes to you with a “Guaranteed” return of 100% or more, that person is either trying to sell you a scam or he is simply being economical with the truth.
Truth is, a lot of these get-rich-quick schemes are akin to gambling schemes. If you should decide to go into them, do it with the mindset that you are gambling and not investing. In which case Kenny Rogers song “The Gambler (You got to know when to hold ‘em, know when to fold ‘em, know when to walk away, know when to run) becomes highly relevant. As for me, if it sounds too good to be true, then it is too good to be true. I will rather stay clear.
3. Never be in a hurry to pay – I have lost count of the number of times I have been told that if I didn’t pay today or in the next week that the offer is off only to skip the deadline and still get a better deal or at least the same deal. I once registered for a conference that promised a 10% discount if participants paid two weeks before the event. Well, the amount was a pricey sum (over $2,000) and I needed some time to gather the money. I eventually paid on the day of the conference, at the convention ground enjoying the same 10% discount the organizers had promised two weeks before. Sometimes, it pays to just call off the bluff of those marketers and cross the deadlines. For me, a red flag typically goes off once I hear or read the words “If you don’t pay now or before day XYZ….”. Don’t get me wrong, there are legitimate offers or promos that do have a time lag and a deadline. But a vast majority of these promos just use this marketing gimmick as a ploy to get you to bring out your chequebook faster. While investment is an opportunity, also know that the person or company selling the pitch to you probably needs your cash more than you need to let go of it. Exercise your right of control.
As I was putting finishing touches to this article, I saw the breaking news on CNN of the purchase by Warren Buffett's Berkshire Hathaway of Precision Castparts in a deal worth $32 Billion. I don’t want to bore you with the details of the deal, but if you are familiar with Warren Buffet's six criteria for acquisition, you would have noticed that the number 5 criteria says—SIMPLE BUSINESS—IF THERE IS A LOT OF TECHNOLOGY, WE WON’T UNDERSTAND IT. Meaning Warren Buffet would only invest in a business that is simple and one that he and his team can understand. If you don’t already know, Warren Buffett is the world’s richest man. If his model for seeing an opportunity for investment is the simplicity and ease of understanding of the business opportunity, you also ought to emulate him in making sure you invest only in business, instruments or products that are simple and one you understand absolutely well.