What does it mean to have better awareness in investing?Dec 04, 2020
With better awareness comes better choices. Better choices lead to better results.
The above sounds like the quote from Spiderman -- With more power comes responsibility.
The Better Awareness - Better Choices - Better Results quote, I learn it from my superhero, Robin Sharma. I first read about it in the 5 AM Club, and I realise that it applies to living our life to the fullest as well, not just to investing.
Let me share an incident on how this would apply in the investing context.
In early 2012, I met a prospect in my office who was looking to invest in my discretionary investment account. The client has been a civil servant her entire life and has just retired at age 55. She has withdrawn her CPF savings, sold her freehold landed property and had an initial sum of $2.4 million to invest. We did not have a conversation on whether there is a need for her to invest. She was business-like, there were no small talks, the discussion straight away was about the return. Specifically, she wanted to know what return my fund could produce for her.
I presented the usual narrative of return not guaranteed and showing her our track record. It is at that point that she took out a document that she just signed and mentioned that she had just invested about $1.5 million in a program that is back by gold and promised return of 2% a month. She further went on to say that unless the discretionary account was able to match or exceed what she has invested in, she is unlikely to be a client. From her perspective, she had an investment that was backed by solid collateral and produced an attractive income stream every month.
I took a look at that document. I worked out that this investment is promising a return of 24% a year. On top of that, it claimed to be backed by gold.
There are some tell-tale signs that this is a scam. One, investment with such attractive terms don't simply appear from nowhere and market to the investing public. There is always proper documentation, prospectus and lodgement with the regulating authorities. Second, the company that sold Susan the product don't appear to be a legitimate investment company. A quick check on the MAS website did not indicate that the firm possesses the necessary license to transact in investment products. Further, I know that investing in gold itself will not produce an income.
I told her that what she invested in is likely a scam. She did not believe me and left my office without investing anything. Some months later, she came back to see me and confide with me that I was right; it was a scam. She lost the entire amount. The dust only starts to settle in 2020, when the company was prosecuted in the Singapore courts. That is why it is essential to be aware of what is happening before you even start to invest. A safe place to start investing is to deal with only regulated companies with the required licenses to transact in investment products.
Novice investors aren't the only one that loses money to scam. Some scam is so convincing that even institutional investor fall prey. On 10 December 2008, news broke that several prominent institutional investors invested in Bernie Madoff's Ponzi scheme.
As the saying goes, if we don't learn the lesson, we are likely to repeat the same mistake.
If you are already investing, how many more mistake could you afford to make before it wipes out your principal sum. It is best to get yourself acquainted with the basic before you start to invest. That is why awareness is the first stage.
If Susan had taken the time to learn about the market before she invests. She might have a better outcome.
Better Awareness - What does it look like?
In Dan Brown's book The Da Vinci Code, cryptographer Sophie Neveu discovers a mathematical code while investigating the murder of her grandfather. She is led to Professor Robert Langdon, who reveals that her grandfather was head of a secret society, the Priority of Scion, which understands the world through a single number, the Golden Ratio, ⏀=1.618.
The Da Vinci Code is friction, but there are numbers that control how the investment world operates, which bears some resemblance to the concept described by Dan Brown.
In total, there are six sets of numbers that you must know.
- The number for measuring return
- The number for measuring risk
- The number for understanding diversification
- The number for valuation
- The number for leverage
- The number for expense
These sixes represent the foundation. And once you have the foundation. A world of better choices will open up to you.
Making Sense of The Investment Marketplace
Use these six numbers to help you with your investment decision making
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