Becoming An Investor: Why and How?
An investor is a person who puts his or her money on different places (e.g. stock exchange, real estate, or precious metals) in order to make a return. Becoming an investor makes it possible to use these returns to create a significant income , and even eventually, to live without working anymore through dividends and rents collected. However, becoming a good investor is definitely not an easy thing to do. You have to be knowledgeable of the economy and above all, to know and seize opportunities when they come forward. In this article we will give some key explaining about how to become a good investor.
What you will learn here:
- The difference between an investor and a speculator
- 5 good reasons to become an investor
- 6 tips to become a successful investor
What is an investor and what differs from a speculator?
An investor is someone who places capital in the hope of getting a return. Everyone can by definition become an investor, but there are differences in size between an amateur and a professional. A good investor is someone who takes a minimal risk in the hope of getting a maximum return. He knows how to recognize good opportunities and seize them.
Two main factors differ the investor from the speculator: the time horizon and the level of risk. An investor typically has a longer time horizon than the speculator. It seeks to place its money in the long run in solid projects and companies, and to limit its risk. A speculator generally seeks to make a quick profit by taking high risks.
The speculator is closer to the player and the more investor of the businessman. The investment media used are multiple: stocks, bonds, real estate, raw materials are usually the most used vehicles.
Why become an investor and not a speculator?
For a major and essential reason: it is much easier to succeed as an investor than as a speculator. Several reasons for this:
- Markets tend to rise in the long term (whether bonds, equities or real estate), which reduces the importance of timing. An investor who returns to a good stock at the wrong time will have little chance of losing out if he intends to keep him for 10 years. The speculator does not have that chance. Increasing its investment horizon allows you to take advantage of the natural upward drift of stock markets and the long-term growth of companies and the economy.
- Speculators often lose their capital quickly because of their significant risk-taking, which does not allow them to gain the experience necessary to have a good knowledge of the market or markets they operate in. In fact, more than 90% of day-traders end up losing. Choosing to become an investor rather than a trader automatically increases your chances of success.
- Investor’s costs are much lower because it does only few transactions in a year, which means paying less in commissions and brokerage fees. Cumulative costs have a very long-term impact, and minimizing them is essential to earning good returns.
- Taxation is lighter. In fact, you are taxed on a higher value when you sell (whether real estate or securities). If your goal is to buy a quality asset that pays you a return every month and you plan to keep it indefinitely, you never pay the tax on the plus value. Becoming an investor allows you to naturally optimize your taxation.
- Less stress and less work. You will be much more calm by making only a few transactions and letting your wallet grow slowly than spending the day in front of your screen to anguish for your positions. And you’ll have a better performance. Becoming an investor naturally maximizes the ratio of time to yield.
How to become a good investor?
That’s where things get tough. There is no real school or training to learn how to become a good investor. I myself have a Master’s degree in Finance and if I learned a lot on the benches of the faculty, I can tell you that it is not there that I learned to invest properly. However I was fortunate to know many talented investors, but also a larger number of speculators (managers of professional portfolios as well as private clients) who lost everything they had. To avoid this and become a winning investor, here is a small list of tips that I hope you will be useful:
- Educate yourself to the fullest. That’s the base. You must be sure to know on your fingertips the investment vehicle you are using and the market on which you operate.As Warren Buffett wisely advises: Invest in what you know. This will allow you two things: develop confidence in your expertise, and know when to hold your investment and when to adapt your strategy when things don’t go the way you planned. For the record, Warren Buffett has always refused to invest in internet shares in the years 2000 because he judged these companies too risky and did not understand their business well. Everyone had mocked him for this at the time. When the dotcom turned out to be a gigantic bubble, which exploded a few years later, Buffett was serene while many of his detractors found themselves ruined. This is because he has been able to stick to his field of expertise, and ignore the opinions of others (2 essential traits). Which brings me to the next point.
- Don’t listen to investment advice of others and rely only on your own opinion (once you have educated yourself, it goes without saying). And always check all the information that happens to you. There are many preachers in the investment world who speak immensely but have never wagered one dollar in their pocket on the “precious advice” they provide. Your banker is there to sell you his products and touch commissions, not to give you effective advice, your Realtor is there for the same reasons, financial journalists receive their salaries whether their advice is good or Bad, university professors repeat theories they read in books, and analysts are more often wrong than reason according to the statistical studies that have been done on their recommendations. Only you are the best qualified to manage your money, because no one is more motivated to enrich you than yourself.
- Know yourself and consider your personality. What do I mean by that? It’s simple. If an investment prevents you from sleeping at night, don’t do it. I know people who refuse to take a loan from banks, which is problematic if you want to become a real estate investor. On the other hand, I know people who obsessively watch the charts of their shares every five minutes as soon as they have a list of stocks in portfolio, and who sell everything as soon as the position moves by a few percent against them. Turning to real estate where there is no real-time quotation will reduce their anxiety. There is no better absolute solution, but there is a solution that suits you better. Find it and use it, it’s your job.
- Know where the opportunities are. In every period of history, some asset classes have achieved good performance and some others have had abominable performance. This is linked to the macroeconomic context and the general conditions, which are constantly changing. In times of growth, stocks are the asset class to be preferred. In times of deflation the obligations are to be preferred. In times of high inflation tangible assets are good investments.If you buy stock in the bearish market, you can select the best companies, you will probably have bad results on your investments. If you buy precious metals in full deflation, you will lose money. All this to say that if your grandfather made a fortune buying gold 50 years ago, don’t do like him thinking that it will work again today, because the economic context has changed. Know permanently what are the general conditions, and whether they play in favor or against the investment you want to achieve (if you want to learn more about it, I invite you to read the article “always knowing where to place your money” ). This requires a few bases in savings, but nothing insurmountable. And you’ll see, there’s always an opportunity somewhere.
- Keep an open mind and be humble. It’s not about being right or wrong, it’s about making money. Know when you’re wrong and readjust your strategy. Don’t let your ego get between you and a profitable investment. Always question yourself.
- Be patient and disciplined. Rome was not made in one day. Remember that investor is synonymous with long-term. Many investors have disappointing results despite a good strategy because they are not patient enough and disciplined to follow it to the letter. To relax remember that time is your friend in finance, it plays in your favor if you have set up a quality strategy. Every day that passes puts money in your pocket, so no need to stress.
Now that you have the basics, you may want to know what are the best investments to enrich you at a lower risk? Start here if you want to know more about the stock market.