Thinking about investing?
Ever thought about investing some money? Well, I’m sure it’s something you’ll do at some time in the future. Most people fear the thought – mainly driven by access to knowledge. You might hear about lots of different terms you don’t understand and they’re probably confusing. In this article, I’m going to summarise four areas that you hear and see a lot of discussion on when linked with investing. These areas include (1) Good Luck versus Great Skill in investing, (2) The Value in Forecasting, (4) Distractions, Biases and Judgement, and (4) Different Financial Institutions.
1. Good Luck versus Great Skill
Imagine you’re a budding young soccer player and you have been given the chance of playing in a penalty shoot-out, best of three with Mo Salah. Let’s say there is an average goalie in there as well. The same idea would apply if you were going to go head-to-head with Serena Williams, and just playing one point in tennis. You might be playing really good tennis at the moment and fancy your chances. Think about the likelihood of beating Mo or Serena?
You might even be particularly good at penalties or playing the best tennis of your life. You might be on a good run and feeling confident. In both cases, you’re setting yourself up that you really fancy your chances. The reality, though, is that Mo and Serena have more skill in the games of soccer and tennis respectively, than you do. After all, they are professionals.
People often can convince themselves into confusing good luck with great skill. This principle applies to investing your money, as much as it does when going head-to-head against Mo or Serena. Great skill always trumps good luck.
2. Is Their Value in Forecasting?
You have probably heard of the saying ‘Everything is great until it isn’t great anymore.’ This statement applies to lots of things in life. Everything seems fine, and then for some reason, something happens, and things go wrong – and often go from bad to worse. Well, when it comes to investing money, the same thing can happen. You might ask the question, ‘Can we predict what’s going to happen in the future, so we know when to buy and when to sell?’
One of the great and most successful investors of today, Warren Buffett, who leads one of the world’s most recognised investment companies, Berkshire Hathaway, doesn’t believe in prediction, and often quotes: ‘Forecasts may tell you a great deal about the forecaster, but they tell you nothing about the future.’ So, whilst forecasts can tell you lots of things, they won’t tell you exactly what’s going to happen, as they simply cannot predict the future. In that case, it’s always better to plan for the worst because then leave the rest to take care of itself.
3. Distractions, Biases and Judgement
Financial stock markets where many investments take place, much like lots of things in life today, are happening faster than ever before with multiple sources of information being communicated to potential investors – most of which we don’t even request. There’s so much news going around it’s hard to figure out what to believe and what to ignore. For someone who’s looking to invest, it means that there is so much external information pushing us to respond, driven by the fear of missing out, also known as FOMO!
It’s important for anyone who’s thinking about investing to be cautious and not just jump into ‘quick-win-make-loads-of-money’ stories of the day and think carefully if it’s something that you know something about – where you have knowledge and can connect the dots between what research is telling you and how this aligns with your own gut feel.
Some great work in the area of ‘bias’ has been done by Israeli psychologists, Daniel Kahneman and Amos Tversky, which, for investment purposes, they termed behavioural economics. This subject is essentially about the judgments and decisions we make, influenced by what we may perceive, have opinions about and how we think – sometimes this works out well, but most times has negative consequences. Another great quote that brings this subject of ‘knowledge’ to life that came from Warren Buffett and highlights the benefits of focus, where he says, “Games are won by players who focus on the playing field, not by those whose eyes are glued to the scoreboard”.
4. Different Financial Institutions
You might have heard about someone you know – maybe your parents or relatives, or maybe over the radio or TV, or through social media – that has invested money in recent times that had a had a rough ride. Meaning they didn’t make any money – instead, they lost money.
When it comes to investing, there are three main types of financial institutions out there. Firstly, you have the main banks, called pillar banks, which serve individuals and businesses. In today’s market, though, investing money on deposit accounts in pillar banks doesn’t attract much interest or return. Secondly, there are investment funds, often called intermediary banking institutions. They receive money from a number of different individuals and invest this in the in the stock market – in equities, which are shares in publicly listed companies, like Google, Amazon & Facebook. They always have a strategy and only listed in certain types of companies that meet their criteria. This generally provides a higher return, but there are higher risks. Thirdly, there is the direct approach, where you can directly invest in the stock market, based on your own research. This of course is the highest risk, and also, potentially, the highest reward.
Whenever you’re thinking about investing money in a financial institution, remember these four (4) things. (1) The difference between ‘Good Luck’ and ‘Great Skill’ when investing, (2) That the value in forecasting isn’t always what it is set out to be, (3) Remember that there are many distractions out there, harvesting your attention, setting you up with new biases every day, many of which will affect your judgement in making decisions, and (4) The main three different financial institutions available: pillar banks, intermediary banks and the stock market direct. These tips are here to help and guide you in the process.