| It may seem daunting, the investment world, if you | | | | I hope this made sense. When you get a letter |
| can say anything about it, would be that there is a | | | | acknowledging that you gave so and so company |
| lot of choice. Most of these options are | | | | $5000 what have you received for your $5000? Just |
| pre-packaged solutions that the marketing | | | | a letter, telling you what you already know. That you |
| departments of these financial organizations, has | | | | invested your cash with them. There is no tangible |
| determined is what the market wants. | | | | intrinsic value in that letter unless it has extensive |
| There are entry costs to any investment and this | | | | gold leaf all over the letter to the value of $5000 |
| often severely erodes returns, that is if a return is | | | | Your money has left your hands and is in the hands |
| achieved. The goal of any investor is to compound | | | | of another. You exchanged your cash for nothing of |
| their capital every year at the highest possible | | | | worth and therefore, you relinquished all control of |
| compounder. The reason for this is simply that | | | | those funds. The ideal risk neutralization is to get |
| interest upon interest grows money exponentially. | | | | something of worth in exchange for your money. |
| The higher the compounder, the more mathematically | | | | Then, you still have your capital in the form of a |
| skewed that return is. | | | | different value. |
| The other objective a professional investor has is to | | | | Lets consider how this can be accomplished. If you |
| reduce risk. This can seem like a very vague thing to | | | | had a very small seed capital account, Say you had |
| many people. Reduce risk? What risk? How do I | | | | only $100 to start your investment activities. OK well |
| reduce it? | | | | what can you buy to re-sell with $100? A mountain |
| Something all investors recognize, this is a | | | | bike? A TV or a CD system? The point of investing |
| fundamental truth. To invest, you need to part with | | | | is to get a return. Thats all. How you get that return |
| money. The funds need to leave your account. You | | | | is completely up to you. If you spent $100 on a TV |
| give the money to another and there is always risk | | | | this week, that you ascertained before buying it, that |
| associated with that. The only exception to this rule | | | | it was actually worth $180 and you sold that TV |
| is the humble bank deposit. A bank is a special type | | | | within just one week, for lets say $140 to get a |
| of corporate entity that is guaranteed by the | | | | quick sale. You would have made a 40% return |
| government. This type of investment is very safe, | | | | within a week. An astonishing level of compounding if |
| however it is also very low yielding. 6% per year is | | | | you can keep it up each week. (which would be |
| nothing to get excited about. | | | | easy) |
| But lets think about that for a second. If we have | | | | The point of the above example illustrates what I |
| two objectives, to compound our money as highly as | | | | mean about reducing risk. If you found an investment |
| possible every year and to reduce risk. The second | | | | object with an intrinsic value, above what you paid |
| objective, to reduce risk, needs to be addressed. If | | | | for it in real cash, you have fully and completely |
| you part with investment money and give it to | | | | eliminated risk. The money has left your account, but |
| someone else, without insuring what you received for | | | | you have a real and tangible good, that you |
| your money has tangible intrinsic value, then you are | | | | exchanged the investment capital for. This is the |
| risking money and the risk is out of your control. | | | | perfect investment. |