Is it to make money or to build wealth?
Huh? Isn’t both the same? After all, isn’t having money having wealth?
Hmm … Not exactly.
Here is a revelation. People who invest to make money are different from other people who invest to build wealth. Both think very differently and approach the subject of investing very differently. In this article, I’ll reveal how they differ and along the way, I’ll share a few pointers on how you can be a better investor.
Investor A: ‘I Invest to Make Money.’
Question: ‘What do most mean when they say they invest to make money?’
Here is my take.
First, I believe the ultimate objective for them to invest is to gain money. In that direction, the key question they will ask is, ‘Can this investment make him more money in the shortest possible amount of time?’ and hence, they would assess the quality of an investment based on two criterias:
1. The Amount of Capital Gains
Let us say, we have two stocks, A Bhd and B Bhd. Both were bought at RM 1 per share by the same person. Subsequently, he had sold A Bhd for RM 2 per share and B Bhd for RM 3 per share. Then, he would say B Bhd is a better investment.
2. Duration of Holding
Once again, we have two stocks, C Bhd and D Bhd. Let us assume that a person bought both of these stocks at RM 1 a share and sold them off at RM 2 a share. But, if his holding period for C Bhd is 1 month and for D Bhd is 1 year, he would say that C Bhd is a better investment than D Bhd.
So, a good investment to them is about earning more money with less time.
Does it make sense?
As a result, this had led many into trading, speculating, and even gambling their money in the stock or property market in an attempt to make money faster. It is a commonality for them to ask for stock tips, read financial news or reports, get the best technical trading tools… etc to help them to do so as who has the time to get educated and master the art of investing.
So, did it work? Has it been a sustainable and a profitable venture for them?
Well, for most, it hasn’t been. Their love of money had pierced them with many griefs for their decisions are often clouded by emotions such as fear and greed.
Here, let us use stocks as an example. For instance, when a stock is offered at a huge discount, many become fearful of it dropping to a lower price as the focus is on not losing money itself. Thus, they don’t buy. But, when a stock price rises higher, many become greedy as they believe it will rise even further in the near future. As such they will buy. Instead of ‘buy low, sell high’, most have ended up ‘buy high, sell low’, resulting in monetary loss.
This is why most people think that investing is risky, without understanding that the issue often lies in the investor himself wanting and loves money itself.
Investor B: ‘I Invest to Build Wealth.’
Back to the earlier question: ‘Isn’t having money having wealth?’
It depends on how you measure wealth.
Is one with RM 1 million wealthier than another who has RM 500,000?
If you say ‘yes’, you are measuring one’s wealth with the amount of possessions he or she has. The more he has, the wealthier he is.
To me, that is not how I measure one’s wealth. Instead of possessions, wealth is measured in time. How long a person could finance his current lifestyle without him needing to be actively working? For instance, if the one who possesses RM 1 million spends RM 200,000 a year in living expenses, his wealth is equivalent to 5 years’ worth of living expenses. Whereas, for the guy who has RM 500,000, his wealth could be 10 years’ worth of living expenses if he keeps his lifestyle at RM 50,000 a year.
In addition, what if the guy who has RM 500,000 is also bringing in RM 50,000 a year in passive income from his investments? This means he is funding his own lifestyle with his passive income, leaving his RM 500,000 relatively untouched if he chooses so. In essence, I would say he has achieved infinite wealth.
= Liquid Assets / (Yearly Expenses – Annual Passive Income)
In this view, even if the guy has RM 500,000, he is financially freer than the one with RM 1 million as he doesn’t not to actively work to support his lifestyle.
Instead of making more money, investors who intend to build wealth would put their focus onto the investment itself for they want their investments to act like money-printing machines that will never wear out in the long run. Why? This is because these ‘machines’ are supposed to bring in income consistently to their investors and thus, giving them the freedom to choose whether or not, to keep on working for their active income or to spend time doing other stuff that they would enjoy.
In that view, instead of fast capital gains, an investment shall be assessed based on 3 main criterias:
This is to ensure that the investments can keep on making money rain or shine. It is a test of resilience and income predictability. This is why investors would be reading up financial statements of a stock first before investing.
Most investors would love to earn increment income from their investments in the long run. This is why they would find out the main drivers of growth for the investments before committing their money into it.
This is to measure how much passive income they will earn for their capital. For them, the higher the yield of an investment, the more appealing it is to them. It is also used as a way to help investors avoid buying into an investment at a high price for the calculation of yields (dividend yields or rental yields) would ensure that they will never overpay but to fish for discounts for their investments.
This is different from people who want to invest to make money and often end up ‘buying high to sell low’ as people who invest to build wealth will have their focus on buying income-producing machines at their lowest prices. Investing to people who want to build wealth is not risky as they are not into guessing what or how the price of an investment would go in the near term.
As such, you could say people who invest to build wealth are ones that treasure time and freedom more than just money itself. It is about achieving freedom by gaining time, which is a commodity more precious than cash.
So, what is your purpose of investing? What do you intend to achieve from it?
I reckon that all should take some time to think about it before investing. Why? This is because if you didn’t think it through, you would likely be one who:
a. Ask for stock tips like ‘What stocks should I buy? Which markets to get into?’
b. Be fearful of market crashes or any adverse news related to investments.
c. Believe that investment success lies in knowing how to predict markets.
d. Be greedy when you see a stock price rising in the short-term.
e. Have no clue as to what advice you should take when investing.
If you find yourself doing the five listed above, it is okay. It shows that you don’t have a perspective of who you are and what you want from investing. If you are searching for answers above, the answer lies in first understanding yourself and have a clear purpose of why you would like to invest your money.
In short, let me list down the differences: