The Only Two Things You need To Be an Investor

Investing has a rep as an arcane game, full of charts, and indices and algos and fancy models like Black-Scholes. And it is. In the bid to quantify, there is an infinity of ways I can try to manipulate and measure numbers to build a sense of predictability into what is essentially a forward facing enterprise. But to be an investor, even a good one, you don’t need to know all that stuff. Trust me. Any complicated discipline always has a few core principles around which everything else revolves. Investing is no exception.

If investing is defined as spending money today on something with the expectation of return in the future, then there really are just two things you have to gain a strong grasp of: a. how to estimate the value of an asset, and b. how to make sense of the pricing of that asset. That’s really it. If you can determine a, you know what that asset is or could be worth to you both now and in the future. And if you can understand b, you can tell what drives the price of the asset and whether or not it makes sense to either buy or sell. Whatever it is you invest in, commodities, equities, currencies, what have you, if you would be good at it, you have to get this either intuitively or with a good methodology.

In my own experience, when I started out investing, I was strongly into technical charting, how to read trends and basically play the demand vs supply game of any asset I tried to trade. It worked, don’t get me wrong. I made some losses, especially at the start, but over time, I could tell within reason when an asset price was going to surge in any direction, up or down, and then trade those movements. So I stacked up a good run of profits. However, I ran into some problems majority of which were: I was trading with too little capital to be darting in and out of markets taking 5,10,15% per trade, with the occasional 50,100, one time even 500% (the losses never got beyond 10-20% because, stop loss). Basically, if I spread my earnings on a per hour pay scale, in terms of how much activity it took to generate, it started looking like peanuts. The second was that I was in school, and could not even spend all my time monitoring markets, timing trades and generally staying on top things. I therefore needed to find a better way. That led me to fundamental investing. In this case, you do all the research on a business(or asset), build out your scenario for it’s long term prospects, and then using the two skills I discussed, peg both a value and an appropriate price for the return you deem comfortable. It’s essentially the Warren Buffet way (not that you’re going to make the man’s returns but it’s a simpler, more patient way of investing). It has the upside of allowing you to ignore the short term movements of the market, which works for me.

Fundamental investing meant that if I could look at the earnings of a business, understand their operations and their financing, I could estimate the present value of their future earnings. That is concept A, in a nutshell. For a currency, this could mean understanding it’s supply, the economics and productivity of it’s issuing country, their macroeconomic position, etc. For commodities, this could mean the economics of it’s production, transport, demand and uses. In all cases, you need to get a sense of what the asset is worth.

The second thing was to see how popular the asset is today and what the market is selling/buying it for as opposed to what you think it’s worth. It’s relatively simple to see what the market is pricing an asset for, it’s much harder to get why that may or may not be an accurate pricing, and more, whether your own estimation is the more likely price it will come to. Then you determine whether or not to invest, and have a sense of your expected return. The rest, at this point, is up to luck. If you do your homework well, it usually pans out. I’ve not been around long enough to be sure, but so far, even my own results agree.

Because of my (as at then) inability to make sense of a business’ numbers in depth, I changed majors to Accounting/Finance from my previous political science, and changed my whole tactics of investing. So far, it’s been great but of course, this is a forward facing enterprise and you’re never really at the point where you can say you know everything you’re doing. I’ll know for sure if I’m doing okay many years from now.

However, the key thing is that it showed me that investing could be simple. Anyone could do it. And if you master those two concepts properly, you could do reallly well at it. Trust me, it’s not so hard.

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