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What is the true idea and definition of Investing?

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What is the true idea and definition of Investing?

Investing is a topic/question that I get asked a lot about and on a regular basis. My friends and people I meet always ask me to share with them investing tips that can help them get started today (more like right now).  What they’re really asking me to do is to recommend a hot stock that they can invest in or point out an overvalued stock that they can short.  They don’t look too happy when I tell them that they are putting the cart before the horse and stock picking is the tip of the spear (the last thing they should focus on when it comes to their investing journey).  You must first get a basic and firm understand of investing fundamentals and everything that mind-maps onto investing.  Stuff like Economics, History of Growth and Prosperity, Accounting, Geo-Politics, Finance, Statistics, Excel Modelling etc.  They seem genuinely confused when I tell them that Investing is the last liberal art there is and they should be as passionate about “deeply understanding” how money grows where it comes from and how it works and moves people and goods great distances around the world as they are about making it.

My philosophy is that if you don’t understand something truly and deeply at its most basic and fundamental level, sooner or later it will be taken away from you by the guy who does.  A fool and his money are soon parted.

With that said, let’s start at the most basic and fundamental level of Investing 101 and get a good understanding of what Investing exactly is?

What is Investing?

Investing is putting $1 dollar away today so that we get $2 dollars back at some time in the future.  It is weighing the opportunity cost and delaying gratification; forgoing a small grape today so that we may enjoy two watermelons tomorrow.  That is the essence of investing.

Now, if you want to figure out how long it will take you to double your money (turn $1 into $2), it depends on a total of five factors and how the interact with each other.  For more and detailed information on how these factors interact with each other and work together, read this page (how to save a million dollars).Those five factors are

  1. Number of years
  2. Rate of Return/Return on Investment
  3. Starting Capital
  4. Payments
  5. Ending Capital

There are 3 ways you can calculate and figure out these numbers. You can do it with a pen and paper, You can use Microsoft Excel or, You can invest a few dollars in a financial calculator.  I highly recommend Texas Instrument’s BAII Plus.  I’ve had mine for 7 years and I consider it one of the best investments I’ve ever made.  I like mine so much that I even purchased a financial calculator app for my Iphone that mimics some of its functions.

Nothing more than a 5 part equation

Now, most people find it a bit startling that a goal as daunting as saving a million dollars (becoming a millionaire and achieving one of the main pillars of the American dream) can be reduced to an equation or a 5 part recipe. But it’s true.  It can be reduced to a 5 part equation because it is a 5 part equation.  Nothing More.

All big things have small beginnings.  Some of the most mind-boggling and breath-taking things, either in nature or man-made, are nothing more than a simple process that iterates over itself many times.

Think fractal geometry that guides the growth of everything from trees and plants and blood vessels of every living thing to coral reefs and galaxies.  You ever notice how the branch of a tree and even its leaf looks like a miniature version of the tree from a distance.  In scientific and mathematical parlance, it’s called self-similarity.

Another such process of iteration is compound interest. Some economists have even suggested using the complexity of nature to build better economic models rather than relying on the sterile throwbacks to physics and the old concepts of rational agents and steady state equilibrium but that’s a whole another discussion.

How to turn $5,000 into $1,000,000

The thing that happens on the surface is very complicated and seems to defy logic and human intuition (starting with $5,000 or $10,000 dollars and turning it into facebook or Microsoft or Apple or Berkshire Hathaway or a million dollars at retirement) but the rule (math) that guides and predicts the behavior can be modelled using some high-level but relatively straightforward mathematics (a model is nothing but a fancy word for an equation; an equation is a fancy word for a mathematical thing that has an equal sign in it).

Now be very mindful, that the model or equation itself is not going to save your or make you a million dollars by itself (you still have to do the hard work of saving wisely and investing shrewdly) but it will give you “VERY REAL” answers to all the tough questions.  Questions such as how far away your goal is if you save a certain amount of money every year and grow it by earning at a certain level of return on that money.  If Investing 101 is the puzzle or first question then we can think of the 5 factors as the first answers. Powerful answers

Also, it can help you figure out how much money you need to save every year or the rate of return you need to earn on your money if you want to end up with a million dollars in X years.  These answers by themselves won’t make you a millionaire but they will ease your anxiety and take the uncertainty out of the hard work that lies ahead of you.

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