What Different Ways Of Investing Money Are There?

Summary: The world of investment is rich in opportunity. It is possible to invest in almost anything! This page looks at some of the different ways of investing money.

In the hope of making investment simpler and easier to understand, this page is NOT going to attempt to discuss lots of complex mathematical models, risk diversification, long-term or short-term, etc etc. Instead, this page will approach investment in a similar way to Warren Buffett.

Simply put, there are really only two types of asset to invest in. These are:

Things you know something or a lot about

and

Things you know very little or nothing about

It turns out that one is a much higher risk way of investing than the other. Can you guess which you should do?

Mr Buffett calls this his 'circle of competence' and he often says that he never steps beyond it. In other words, there are lots of opportunities, but if he doesn't understand something, he does not do it.

If we think about companies quoted on the stock exchange for a moment (the area in which Buffett is most successful), there are lots of businesses in lots of sectors. His theory is that he sees no need to invest in high-tech firms (for example) when there are so many low-tech firms still making products and delivering services that make a profit.

As ever, Warren Buffett uses impecable logic.

But sure, he is an investment and business philosopher as well as many other things. Can the rest of us copy him?

It would seem that he uses techniques that are generally different to other investing methods - which would explain his incredible results. This focus does reduce risk though - it must do.

He is famous for saying that, "Knowledge reduces risk" and this is the real principle to focus upon. It is much less likely that a person will make a mistake in their investment if they really understand and consider closely their actions.

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The great thing about this principle is that it can be applied universally to virtually every different way of investing money. From antique chairs, to fine art, to stocks and companies, to diamonds and rare books and on and on.

If you don't know what goes on in the currency markets, for example, there are really three choices:

1. Learn!

2. Avoid them!

3. Pay someone else to do it for you (in other words, invest in a specialised fund)

This mindset ought to prevail no matter the asset class, with the exception that there are very few (any?) specialised funds for digital assets, rare books, stamps, furniture and other tangibles.

Therefore, for most asset classes that have potentially limited liquidity, only two choices remain:

1. Learn!

2. Avoid the asset!

And this is one of the many winning strategies of Mr Buffett and others. Invest in what you know and understand.

As an example of this, think to your own career or job. Have you worked in one industry or sector for more than a few years? If you have, and have been paying any level of attention to the workings of these businesses, you probably know more about the sector than most amateur investors. You may well understand the industry better than many professional investors and fund managers too.

That sounds like it could offer some advantages!

Please understand, this is not an encouragement to insider trading, just a realisation that some people know more about a topic than other people do.

For example, the average farmer almost certainly knows more about crop cycles, the impact of weather conditions, fertilizers, yield sizes and much more than a trader or analyst ever will. After years in a trade this becomes instinct rather than education. That is certainly an advantage in most markets!

This advantage ought to help an investor to find investments that provide a 'margin of safety'. Buffett calls these the three most important words in investment.

What does he mean by them? Simply that an investor needs to buy advantageously, usually by having a greater understanding of the market or industry than most others do. Buffett, for example, has made billions of dollars in profits by investing in companies that were fundamentally sound businesses, but for some reason, the stock market was marking them down and undervaluing them.

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This page even shows that there is a mathematical formula for it!

A story from BusinessWeek in 2006 shows just how much careful investors concentrate on this idea. People were paying US$700 for a used book is a pretty serious price...

Therefore, whichever of the different ways of investing money that you choose, we would like to recommend finding an area in which you personally are the most comfortable and where your background knowledge and experience give you the most chance of success.

Good luck!

To read more about related topics, please follow these links:

A Beginners Guide To Investing

What Is The Point Of Safe Investing?

How Does Investing In Rental Properties Compare To The Stock Market?

Should You Be Concerned By Currency Exchange Risk?

How Do The Top 1 Percent Diversify Their Wealth?