It’s not an investment if we do not understand what we are investing into

It’s not an investment if we do not understand what we are investing into.

This is what Investopedia says about Investment vs Betting / Gambling

“In an investment, you are providing some individual or entity with funds to be put to work growing a business, starting new projects, or maintaining day-to-day revenue generation. Investments, while they can be risky, have a positive expected return. Gambles, on the other hand, are based on chance and not putting money to work. Gambles are highly risky and also have a negative expected return in most cases (e.g., at a casino).” (click here to read more)

Investment Scams can happen because we just do not understand

One major reason why investment related scams happen is because people do not know enough about investment itself. If someone comes to us and tells us that if we invest into the ‘scheme’ we will get returns of 1.5% per month and we believe, it meant that we are no longer investing. We are just gambling.

Why do I say so? Well, if 1.5% return is possible per month, that friend will not need to sell to us. They can sell to the banks and the banks could buy billions and billions of it. If they sell to us, we can only buy hundreds or thousands.

Banks will earn exceptional profits if the 1.5% return per month is real

Why would banks buy? Erm… Banks pay us 2% (or lower) for Fixed Deposit. If banks can earn 1.5% per month, it meant that the banks would earn exceptional profits! 1.5% x 12 = 18% returns per year. Banks only pay 2% for fixed deposits, so the banks will gain a gross 16%! Why did the bank not invest then if it’s really 1.5% per month? The reason is because banks INVEST. They should not gamble using our hard earned money.

Buying a property can also be a gamble yeah

Long time ago, there was this actual conversation.

Question: Why did you buy the property? Answer: My friend say the market is the best for buyers now.

Question: What do you intend to do with the property? Answer: My friend say can rent out and wait for the price to go up. Then, can sell.

Question: How much to rent out? Who are you targeting? What price you want to sell? Answer: No idea lah. My friend helping me…

I do not even wish to ask if the friend is someone from real estate industry or not. I hope my friend’s blind “property investment” will turn out fine. My friend was not investing… he was just buying because his friend was asking. He has the money and he bought a property. Period.

Investment returns will take time because businesses need time

If we invest into a start-up, it may yield us returns we could only dream of. Or it could go bankrupt. It will take time. Probably a few years if not more.

If we invest into a business, the business can do well or it could not survive the Covid-19 lockdowns. It will take time, probably a few years if not more.

If we invest into a listed company and we know what it does, we would also know that it will need the business volume to increase for the revenue to increase and then for the profits to increase which will in turn be pushing up the valuation of the company upwards. The share price would then move up.

Bet big, win big. Everyone knows… right?

Every investment has its risks. When we do not understand the business, when we do not know why the prices could go up or come down, when we did not do due diligence at all, then the money we have put in may not be an investment. Then again, some people say that investment is putting money into an asset and as long as it gives returns, it should be an investment.

Well, just remember that when it gives exceptional returns which are beyond what a business could provide, then that’s no longer an investment. You just got lucky, hat’s all. It is unlikely that one can be lucky every time. Happy understanding.

Property News Malaysia? Sign up for daily investment news updates (FREE since Nov 2013 and FOREVER). Alternatively, Follow me on Telegram here.

Please LIKE kopiandproperty.my FB page to get daily updates about the property market beyond kopiandproperty.my articles. Else, follow me on Twitter here.

Next suggested article: Will property price really rise until there’s no ceiling? 

Header Image by eko pramono from Pixabay