Summary: There are a great many factors to consider in any investment. In fact, there are so many potential factors that any beginners guide to investing must - by definition - be inadequate. So please accept our apologies for this failure in advance!
A great place to start is with setting a goal. What do you want to achieve with the spare money you have? To plan for retirement? To pay for the college education of a child? Your choices for an investment ought to be guided by this decision.
The following video clip is a
presentation by Tony Robbins. In most areas it is fairly
straightforward and represents the best practice of most financial
advice. However, as is always the case with Tony Robbins, the concepts
are explained well and the video ought to help you think about what your goals are and why. (The presentation is over 1 hour long).
The factors are almost always present in one form or another in virtually every market. And lets be clear, there is a market for everything - somewhere...
The stock market might be the most obvious place to think of as a market - hundreds of thousands of buyers and sellers every day, billions in assets changing hands - but every asset and asset class will have a market of some sort. That market may not be as organised as a stock exchange - few places are - but it will exist.
If you choose to buy and sell art, then your market is brought
together by auction houses. If you choose to buy and sell stamps, then
your market might be auction houses as well, but it might also be eBay
and specialised online locations as well. If you are in the residential
property market, then real estate agents create your market.
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There are so many other markets though, from classic cars to racehorses to comics to movie posters to diamonds and precious stones to gold and silver and on and on and on. This vast range means that specific knowledge provides a real advantage.
Some of these investment markets will require lots of specialised information and a serious amount of technology (the domain name market comes to mind) making them similar to Wall Street in some ways. While others will simply require you to be able to judge the authenticity of something (art, for example) and then guess at it's value.
Go with what you know
This requirement for knowledge, preferably specialised, provides a potential opportunity. It is wise for any beginners guide to investing money to try and highlight this potential advantage. Therefore, it is important for you, the investor, to think as clearly as possible about the types of unusual knowledge that you might have. Do you happen to know a lot about wine, or are you fascinated by sports memorabilia or in love with watches? Any such interest can and should be the first place that you start thinking about potential opportunities.
Where is your market located? Does this jurisdiction recognise property rights? This is the most fundamental question of all for an investor. Will an outside body take my asset from me? If they do, can I challenge the seizure in the courts? To what extent are the rights of an investor protected legally? This may sound trite, but there are many parts of the world where corruption is rife, even (especially?) in government.
The nature of the marketplace is very important because it has an influence on the liquidity of your asset. Liquidity of the market is a term used for ease of sale. How quickly and easily can your asset be turned back into cash? Are there buyers waiting eagerly for it, or not? What price will these buyers be willing to pay?
Related to liquidity is transparency. A stock exchange is a regulated environment to buy and sell assets. This - in part - means that the prices at which stocks and shares trade for is known. It might not be known by you, but it is available publicly somewhere, if you know where to look.
However, artworks of historic importance may be unique. Perhaps a
similar example has not been sold for years, or decades. What guide
price can be applied to judge a fair value? Therefore, information about
your market is important. In the world of property, these examples are
known as 'comparables' and are used to justify a valuation (usually for
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How is a market value decided? What is a fair price to pay? Are you paying too much or not enough? Clearly, this is important for any investor, beginner or experienced.
Three little words
The two people recognised as the greatest investors ever are Warren Buffett and Charlie Munger of Berkshire Hathaway. They both are very clear in their belief that the three most important words in investment are margin of safety. Whilst they have made their fortunes investing in companies, your author sees no reason why this logic could and should not apply to other asset classes.
The essence of a margin of safety is that it is wise to purchase assets - if possible - for below their actual value. Therefore, if at any time they are sold or liquidated, a profit ought to be guaranteed. While this may seem obvious, it is one of the investing basics that is overlooked by the majority of people.
How much risk is being taken? Are the potential risks fully understood? (No beginners guide to investing could ever explains risk properly!) What impact might the risks have - if they come true - on your portfolio and your lifestyle? (During the 2008 credit and banking crisis, it seems that a number of very wealthy businessmen had used borrowings to grow more quickly - so much so that there was a slowdown in spending by Russian oligarchs! The 2011 book, The High Beta Rich by Robert Frank discusses this phenomenon in the American super-rich and is highly recommended.)
What is the tax status of an investment? Will any profits be taxed? At what rate, in what way and when? Can these taxes be legally minimised?
What transaction fees will need to be paid to buy or sell the asset? What impact will they have on the overall return on an investment? Some investments, such as residential property and hedge funds, have very high fees for purchases or management. Other investments, such as gold bullion for example, may have an annual storage cost that reflects the security levels required.
Speaking of property, it is often viewed as a core investment for many people. Real estate investing can be very lucrative, but there are risks as people in many countries have found out since 2007. The amount of borrowed money involved in most real estate transactions adds significantly to the risks involved.
It is likely that any normal person's portfolio will become very exposed when property is added. In terms of balancing the risks in a portfolio, adding just one property tends to throw all numbers out of balance, partly because of the size of the transaction and partly the level of debt. But that is just the family home! When an investment property (information here) is added, portfolio theories go out of the window. In other words, real estate investing can be too risky for many people.
Your author has a close friend that is an investment sage - he always describes residential property as being "very lumpy" in a portfolio. It is hard to disagree.
As can be seen, any beginner to the world of investing - be it in stocks and bonds or art and tangibles
- needs to take a great many factors into consideration.
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