Basics of Investing (part 1)

Most of the people have doubt on investing. What is investing? How it works?

I’m very much inspired by Charlie Munger, who is one of the famous and successful invester.

I will share everything related to Investing(Mark that all the tips I will share here are not mine, it is what Charlie Munger has to say about it).

And most importantly I will share how you too can start investing.

Of course, I cannot explain everything in one single post, investing is a huge topic. I will make a series on this. But I promise that I will try to explain in a simple way as much possible.

It’s probably the best way to start with the very basics. I will slowly but surely work way up in covering things like Stocks versus Bonds, Mutual Funds versus ETFs, asset allocation portfolios and more.

I’m going to make sure it's easy to understand so those words sound intimidating don't worry. We're going to start from scratch and I promise you once I'm done with you, you won't be intimidated anymore.

But before we can run, we have to walk. So the first thing we're going to address what is investing in the first place.

Now of course we're going to focus on the investment of money. But normally we hear people talking about making investments with things other than money all the time.

So, for example maybe Little Tom invested a lot of time reading about Cars and Engineering because he liked watching car races on TV.

This likely increased his enjoyment level when watching those races. So while this is not a financial investment for the purpose of our series, we do see the same framework of what investing is.

Investing in general is the committing of resources into some endeavour or thing in the expectation of a positive return.

In Tom's case the resource he was committing was his time. The endeavour or thing was reading books in doing research online about cars and engineering. And his return was an increased level of enjoyment when watching car races .

Now let's look at a financial investment which is what the rest of our series will be focusing in on. In this case the resource being committed is going to be money.

The endeavour or thing is going to be a financial investment which can be stocks, bonds, investment funds, real estate and more and the return is the difference between the money we end up with versus the money we put in.

So, let's look at a simple example 

Let's say Sonia walks into his bank and says she wants to invest $100. A salesperson at the bank might help Sonia to invest that $100 into a Mutual Fund, which is a type of investment vehicle and don't worry if you don't know or unfamiliar with that term. It's okay we'll get into it later in upcoming blogs. 

But let's look at three possible outcomes after one year.  

In outcome one, the value of our holding in this Mutual Fund has increased to $110.

In outcome two, the value of our holding in this Mutual Fund hasn't changed and is $100.

And in outcome three the value of our holding in this mutual fund is now $90.

So he's either had a return of  +10%, 0% or  -10%.

So, going back to our definition of investing of all committed resources.

In this case financial resources or money totalling $100 into an endeavour or thing.

In this case the Mutual Fund, which is a type of financial investment.

In the expectation of a positive return, we showed three possible return scenarios and saw that it was possible to have a positive return, a flat return or a negative return.

So now we have a working definition of what investing is in general and I've given you a bit of a hint that sometimes it might not work out in the way you might expect.

You can consider this like dipping our toes into the most famous and fundamental concepts in investing Risk versus Return .But we'll tackle that in detail in this series and you do not want to miss that.

There's going to be plenty in next post which yes, I will publish in the next few days.

We are going to tackle another fundamental question 

Why invest in the first place? Why should you start investing? Or Why all successful people invest?

I’m making it short so that you understand properly. And I don’t want mess up with all the typical concepts. This will be continued in the next post. 

Click Here to read part 2