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!