Understanding Investing (1): Why It’s Confusing

One of the best books I have ever read on the subject of investing is Rich Dad’s Guide to Investing written by Robert Kiyosaki. I would like to share with you some of the important stuff I learnt in this book that will help you get a better understanding of this confusing subject.

1. Different People Invest in Different Things

Since it means different things to different people:

  • Some people invest in large families as a way to ensure they are taken care of in their old age.
  • Others invest in a good education, job security, and benefits. They endeavour to make themselves and their marketable skills as the assets.
  • While others invest in external assets such as stocks, mutual funds, e.t.c.

2. There are Many Different Investment Products

These include stocks, bonds, mutual funds/unit trusts, real estate, insurance, commodities, savings, collectibles, precious metals, hedge funds, etc. Each one of these groups can further be broken down into different subgroups.

For example,

Stocks can be subdivided into:

  • Common stock,
  • Preferred stock,
  • Blue chip stock,
  • Small cap stock,
  • Technical stock, e.t.c.

Mutual funds/Unit trusts can be subdivided into:

  • Aggressive growth fund,
  • Income fund,
  • Balanced fund,
  • Index fund,
  • Closed end fund, e.t.c.

Real estate can be subdivided into:

  • Single family homes/apartments,
  • Multi-family homes/apartments,
  • Commercial office buildings,
  • Commercial retail buildings,
  • Warehousing,
  • Industrial buildings, e.t.c.

Insurance can be subdivided into:

  • Life insurance: Whole life, Term, Endowment, Variable, e.t.c ,
  • Retirement products: Personal Pension Plans, Annuities, e.t.c,
  • General insurance, e.t.c.

All these different investment products are each designed to accomplish something different. This complicates the subject of investing even further because there are different investment procedures used in dealing with these investment products to achieve the desired goal or investment plan.

3. There are Different Investment Procedures

The word “procedure” here describes the technique, method, or formula for buying, selling, trading, or holding these investment products.

Here are some of the different types of investment procedures:

  • Buy, hold,...and pray :),
  • Buy and sell (trading),
  • Dollar cost averaging,
  • Sell then buy,
  • Option buying and selling (trading),
  • Brokering,
  • Saving, e.t.c.

4. Many Investors are classified by their Investment Procedures and Products.

Here are some examples of different types of investors, their product specialties, and their investing procedures:

Investor Investment products Investment procedures
Stock trader Stocks Buying and holding,Sell then buy, Dollar cost averaging
Day trader  Stocks Buying and selling within a day
Real estate investor Real estate Buying and holding (rent or lease), Buying, and selling (Flipping)
Rare coins collector Rare coins Buying and holding
Car dealer Cars Buying and selling
Saver Bank fixed deposits Saving for long term
Manufacturer/ Industrialist Consumable/ non-consumables products Producing products in demand and sell
Wholesaler Consumable/
non-consumables products
Buying and selling in bulk
Retailer Consumable/
non-consumables products
Buying and selling in small quantities
Broker/Agent Consumable/non-consumables products and services Linking sellers and buyers

If you look around you, you’ll see that people have invested in many different things. Look at the furniture in your house, your car, your favourite soft drinks, the office buildings you work in, the PC, Mac or Laptop you are currently using, the shopping center where your favourite store is in, the bank, the hotels, your clothes, etc. All of these things are there because someone invested in the business or building that delivers those things.

5. No One Is an Expert at Everything

Since investing means different things to different people, there is no one person who can possibly be an expert at the entire subject. There are many different investment products and many different investment procedures.

6. Everyone has a Bias

Yes, everyone has a bias including you.

A person who is good at stocks will say, “Stocks are your best investment.” A person who loves real estate will say, “Real estate is the basis of all wealth.” Some people say “Diversify. Don’t put all your eggs in one basket,” and still others such as Warren Buffet, America’s greatest investor, says, “Don’t diversify. Put all your eggs in one basket and watch that basket closely.” Then you add your procedure bias.

All of this personal bias from the so-called experts adds to the confusion that shrouds the subject of investing.

So, what really is investing?

Investing Is a Plan, Not a Product or Procedure.