You are investing. Really?

Like most people who want to have a better and more comfortable life in the future, I make sure I make my money work hard just like me. We want be sure we can arrive at the desirable financial state on time….or perhaps in time.

Many laypersons like me who are not from the finance and investment industries, we are less attracted to technical and financial terms such as GDP, national debt or moving averages. Most laypersons are more interested in “how much the interest is, how much I can get if I were to invest for 5 years or how much I can sell off this house after 5 years?”. The financial elements that we are interested in are those that benefit or threaten us directly and immediately. That’s why I write this article to give a better understanding of the concepts related to investment s from a layperson perspective so that we are clearer on our financial positions and also the purposes of certain investing. 

‘Investment’ is one of the most common financial terms used in our daily dialog. We use this term for anything ranging from buying a house to buying a mobile phone. To be fair, even developers and property agents also use the term ‘investment’ loosely to indicate ‘you can make money.’ In concept, investment refers to money that you already have and you want to make your money work harder i.e. give you better returns. So what are considered as money you already have? Your hard-earned money you have in the bank or EPF, your money in the form of shares or bonds that you have paid for and also the house you have already owned. The key word is ‘have’ which means the investments you have are already fully owned by you.

Now, let’s take a look at a house you intend to buy. The property is sold to you at RM500,000 and you think that this property can appreciate rapidly in the next 5 years. You feel good because you have made a sound investment. The question is: “Did you pay with your own money or you take a housing loan to make the purchase?” If you are using your own money that you already have, then it is called investment. But if you do not own the $500,000 and are using a bank loan, you are actually not investing. You are actually trading. The simple concept of trading is ‘buy low and sell high’. For instance, you buy a property at $500,000 and you sell it later for $700,000 to  make $200,000. With the margin you make, you settle the loan and interests incurred by the loan you have taken earlier and the balance is called ‘profit before property gain tax’. Is the property purchase different from a convenient store that buys bread at $2.80 and sells to a shopper at $3.20? It’s more or less the same i.e. “buy low and sell high”. So, when you buy something not with your own money and you plan to sell it for a profit, you are actually trading.

In trading, the areas of focus will be quite different from investment. For investment, it is more towards return on investment and also its security. For trading, it's about ‘buy low and sell high’ and so profiteering comes from selling at higher prices (better margin), selling more at one time (better revenue) or accelerating the buying-selling cycle faster (faster turnaround). The other important factor will be how much you can ‘leverage’ by using other people’s money (e.g. bank loan) or other investors with real money. So, is the house that you live in right now yours? If yes, hope your investment is giving you good returns soon. If it is still under a bank loan, well…how is the trading so far?

There are times that you buy something to use and when you sell it away later, it is lower than the original price bought. A good example will be a car. Buying a car now and plan to sell it later at a loss is actually rental as a concept. The main difference is that in actual rental, you don’t own that car but in our rental concept discussed here, you own that car until you sell it away. The rental is equivalent to the difference of the initial price and the final price you sell the car away. For instance, when you buy a car for $100,000 and after 5 years, you sell it off at $50,000, the difference is $50,000. In other words, your rental per year is $10,000. Assuming you rent a car when you were traveling, what do you do with it? Yes, you maximize it. The same goes to the other things that you have bought and plan to sell later at a loss. Maximize the usage (without breaking it of course).

What about buying a better smart phone? Some call it investment. Really? Let’s do the analysis. Did you pay for it? Yes. Did you intend to sell it off at a higher or lower price? No. Then, the purchase of the smart phone is not related to investment and rental. However, if the phone helps a lot in your work or life, then it can be termed as an upgrade. Upgrade also gives us return on investment but not in a monetary form. The returns could come in the form of effort, time or comfort (quality). If the new phone allows you to reply to your mails without going back to the office, you could save time and effort. That’s a form of return but it is unrelated to money.

The above discussion has been made based on a single-minded intention. But in an actual environment, we may buy or invest in something for more than one intention. For example, we have a tradable property and at the same time, we also live in that property. Some rent out the property. So, how to treat your own unique scenario? My suggestion is to categorize your efforts into ‘cost-related’ and ‘revenue-related’.

Cost-related efforts help reduce your costs and because of that you can make a better margin. Revenue-related efforts on the other hand help increase the future selling and because of that, you make a better margin. So, if I rent out my property while waiting for the right time to sell it off, then my effort is cost-related because it helps me reduce the interests I need to pay to the bank. If I construct a swimming pool in my property, then it is revenue-related because I intend to fetch a higher price when I sell off.

Finally, there is one type of ‘investment’, which is truly not an investment but consumption. We buy it with the money we have, we don't intend to sell it and it does not fetch a decent price even if we try to sell it. All these things fall under ‘cost of doing business’ or some call it ‘necessary evil.’ These are things such as newspaper, petrol or entertainment that are necessary for the business or life but do not have a decent future value. So, if we buy a new phone to use because we like it, it is called consumption. Anyone telling himself or herself it’s an investment is merely camouflaging the guilt of shopping.

Let’s now summarize all these in my environment. I live in a semi-detached house that I have purchased using a bank loan and I intend to sell the house in next 7 years. Hhhhmmm….that’s trading. I bought a new car last year and I intend to sell it off in 5 years. Aaahhhh…that’s rental. I recently checked my shares in some mutual funds and the prices have gone up….that’s an investment. I plan to buy a new 60” TV this weekend, well…that will be an upgrade for comfort or may be it’s merely consumption!