Investing made easy

This article is for long-term and medium-term investors. It is not suitable for short-term investors, speculators nor punters. Short-term investors should research "charting". Speculators should join the forums that feed the rumour mills. Punters should perhaps look up astrology, lol. This web-site is for outlooks of 10 years and beyond.

Investment need not be complicated or time-consuming. Here we look at easy ways to decide on what to invest in and the thought process behind it.

- Buy Low, Sell High

- Why Invest?

- Return vs Risk

- Hedging your bets

- Short-Term vs Long-Term Investors

- Growth & Liquidity

- Your Portfolio is your expectations

- Currency

- Inflation & Tax in Countries

- Interest Rates & Fixed Deposits

- Earnings Rates, P/E Ratios & Compounding

- Real Estate Property

- Treasuries & Bonds

- Equity Shares, Unit Trusts & Dividends

- Giving personal Loans

- Long Cycle of Boom & Bust

- Getting Financial information

- Being Inconspicuous

- Going in alone

Buy Low, Sell High

If everything was this simple, we would all be rich. Easy to say, difficult to do. And yet, when there is herd mentality or sometimes panic or just the thrill of the moment, people forget this. You can't get it right on every investment but you can get it right "on average". You can't get it right every time but you can get it right in the long run.

Why Invest?

Classical Economics assumes that the objective of every business is to "maximise profits". Looking at investments, this is the everyday function for day-traders, unit-trusts & banks.

Long-term investors are more passive. They do not actively invest everyday nor every week nor every month. They only invest when they decide to; when they are ready. The objectives for a long term investor can be summarised as

(a) to earn enough to be comfortable,

(b) to save for a rainy day, and

(c) to preserve wealth for their descendents,

in that order of priority.

(a) Earning enough to be comfortable - The definition of "Comfort" varies from person to person but, in general, you can quantify this amount of money needed. This is the typical "pension fund plan" where an employee invests a certain amount every month and, after reaching the pension age, the pension fund repays them a certain amount every month.

- When you have enough money put aside for (a), then you look at (b).

(b) Saving for a rainy day - Shit happens! Things break down. People fall sick. This is more difficult to estimate but you can sort of decide how much you want to put aside for the (one) rainy day. When the rainy day comes, you have to spend the money and then put aside money for the next (one) rainy day. One rainy day at a time.

- When you have put aside money for (a) & (b), then the rest goes into (c).

(c) Preserving wealth for your children (& theirs) - Here the time-frame is very long; beyond our lifetime. In this perspective, we are just temporary custodians of the wealth. Everything will be passed on eventually.

Through a philosophy of "why we invest", we can arrive at an expectation of monetary amount-A, amount-B and the remainder is amount-C. Having realistic expectations will make your investment choices more obvious. Examples: What investment can give a yield of amount-A per year? Amount-B should be in cash-ready (liquid) investments in case of emergency. Amount-C is the amount you can "sit on" for a very long time (liquidity is not an issue).

Return -vs- Risk

Jargon-busting time:-

Principal (Investment) = the Amount you put into an investment. Let's say you acquire 100 shares at $1,000. So your acquisition price is $10.

(Financial) Yield = the Amount in periodic payments to you by the for investing. Let's say the company pays a dividend of of $50... so your Yield = 5%.

(Capital) Gain = the Amount you gained by disposing of the investment. Let's say you sold the 100 shares at $1100. So you made a Gain of $100 {Disposal Proceeds minus Acquisition Cost}.

(Total) Return = the Gain plus Yield. So your Return was $150 -or- 15%.

(Financial) Risk is the measure of Uncertainty. Yields can be unreliable. Prices can be unstable. Risk is difficult to define and so we measure it as "σ" (sigma = one standard deviation), ie how much the Return (on Investment) varies over time. Invariably, the concern is "downside risk"; the chance of making losses.

If we make a graph of available investments using Return (y-axis) -vs- Risk (x-axis), we would get something like the graph below.

The green-dots show fixed-deposits; low return, no risk.

The blue-dots show bonds; moderate return, small risk.

The red-dots show equities/ shares; higher return, wide range of risk.

How does this work? A logical investor would pick the investment with the highest returns for any given risk. If we look at fixed-deposits (green-dots), an investor would choose the highest green-dot (as the lower green-dots have inferior returns).

In the second graph, curved lines have been added to mark out the highest returns for any given risk. This is called the "efficient frontier" because any investment below the line gives a worse return.

The efficient choice of investment is either the highest green-dot or anything on the efficient frontier(s).

The third graph shows the efficient "mix" of choices. The mix is where some is invested in fixed-deposits, some in bonds and some in equities/ shares. The selected fixed-deposit is the highest green-dot, the selected bond is the blue-dot touching the line and the selected equity-shares is the red-dot touching the line.

By adjusting the mix of investments, an investor can choose a point on the straight line where he/she is comfortable with the risk. This is called the Capital Asset Pricing Model.

Hedging your bets

From the Capital Asset Pricing Model (CAPM), we learn to only pick the most efficient fixed deposit, most efficient bonds and the most efficient equity shares. The "mix" we choose should reflect our "risk-appetite". Whereas the fixed deposits and bonds would likely deliver the expected return, there is a risk that the equity shares may not.

An investor can reduce this volatility by (a) averaging over time, or (b) hedging the bet.

Let's look at a horse race. In this horse race, the probability of winning is say; horse-A @ 40%, horse-B @ 30%, horse-C @ 20% and the other horses at 10%.

"Averaging over time" is where you repeatedly bet $80 every week on horse-A. Eventually, it will average out to be 40%.

"Hedging your bet" is where you bet say, $60 on horse-A and $20 on horse-B. So if horse-A doesn't win, the next likely winner is horse-B.

Or you can do both.

You may have already figured out that it's not only the "probability of winning" that is important, but also the "amount you win" (Total Return).

Going back to CAPM, let's say you have decided on your investment portfolio as being: fixed deposits @ 40% investment, bonds @ 30% investment and equity shares @ 30%.

For "averaging over time", you may need to hold the equity shares for a much longer period of time to get the expected return.

For "hedging", you may adjust your portfolio to be: fixed deposits @ 40%, bonds @ 30%, equity @ 30% but is split between share-A @ 20% and share-B @10%.

For large investors, they can also hedge by operating their investments in multiple countries. In this case, they are also hedging the currency as well as having a wider choice of investments. Typically, for the large international investor, they would operate in a "home" country, a "back-up" country as well as a private-banking country.

"Home" country is where they live. They have family real-estate property there. They expenses are in this country's currency.

"Back-Up" country is anywhere they have a connection with or they feel safe and comfortable there. They may have a holiday home there. If any disaster should befall their home country, they would move to the back-up country.

"Private banking" country is where their private bank is located. For a wider choice of international investments, it is easier to operate through a private bank. Not many countries allow unlimited multi-currency investments and even fewer countries have the infrastructure to handle this.

Short-Term vs Long-Term Investors

The word "Investor" can refer to many people with different views and intentions. "Short-term" and "Long-term" refers to how much time the investor has to sell whatever they have bought. The period of time that the investors have (to sell what they have bought) will determine what they can and cannot participate in.

Short-term investors are basically limited in what they can buy & sell. "Punters" may only have a week to sell what they have bought due to their credit limits. "Players" may only have a month... or a year. In an Investment House, employees in Trading Department have to take profit within a month while employees in Investment Department have to show performance within a year.

If you only have a month to complete your buy & sell, you are basically limited only to equity/ shares. If you have a year to profit, you can consider bonds as well as equity shares. Short-term investors usually have to monitor their asset prices everyday.

Long-term investors (this includes savers who invest) have more options to consider. They can invest in a real-estate property, fixed deposits, bonds & equity/ shares. Typically they may not want to monitor their asset prices too often and so they may invest using Unit-Trusts to buy into equity/ shares.

Growth & Liquidity

In investments, growth refers to the increase in intrinsic value of the asset over time. Typically, this applies to long-term investments.

In the long-run, the "intrinsic value of the asset" should be the same as "market value of the asset". At any one time, this is usually not the case because the "market price" has other factors affecting it. For example, availability of credit where a shortage of credit will depress market prices. There is also the unpredictable effect of market speculation on market prices

Liquidity refers to how quickly an asset can be converted into cash. Fixed deposits can be converted instantly into cash. Listed bonds and equity shares can be converted to cash in a few days. "Listed" refers to listed on a stock exchange and so it is instantly traded on that exchange. "Unlisted" bonds and equity shares are privately held and will have their own process for selling which may take weeks. Real-estate property is the least liquid taking at least 3 months to convert into cash.

Previously, we looked at dividing investments into (a) living expenses (to be comfortable), (b) saving for a rainy day, and (c) growing wealth for posterity. Items (a) & (b) have liquidity requirements. Item (c) is basically for long-term growth.

Your Portfolio is your expectations

When you add together all your investments, the total big picture is your "portfolio".

A portfolio will comprise of some safe investments, some medium-risk investments and some risky investments. How much of each depends on your outlook of what the investment world looks like.

Your portfolio of investments should reflect your opinion about these assets and what you expect to happen. The important word is "your". Your portfolio should not be somebody else's opinion and expectations.

Sometimes the world is all busy growing. Sometimes it is in turmoil. Your portfolio should change as your expectations change.

Before making any decision, always look at as many choices and alternatives as you can. Get as much information on these choices. If you do not understand the product, do not invest in it. If the product information is not convincing, do not invest in it.

When assessing any investment with risk, always remember that, in order to achieve a good total return, the investor has to "buy low" and has to "sell high". The price is high when the market is heavily buying the investment and more people want to buy it. The price is low when the market is heavily selling the investment and few people want to buy it. Assuming we are looking at only the best performing investments with the lowest (acceptable) risk, then the difference between high and low prices is just timing. You have to buy when the market is selling and you have to sell when the market is buying... and be convinced to do it.

Psychologically, this is very difficult to do because you are often doing the opposite of what everyone else is doing. In addition, you have very little control over the future. You do not know when the market will recover. You don't know the future conditions of the industry you have invested in. You don't know what the selling price will be.

Hence, you have to:-

(a) know the investment product well,

(b) have confidence in the value of investment,

(c) be convinced that the buying price is a bargain, and

(d) reasonably expect to be able to sell it at a good (fair) price.

Currency

Before money was invented, people exchanged things in what is called "barter trade". Example: 1 cow = 3 sheep = 18 chickens. Everything was negotiable.

Money was introduced as a "medium of exchange" and a "store of value". "Medium of Exchange" is "I want 3 sheep but I don't have a cow, so here are 2 gold coins". "Store of Value" is "With 2 gold coins, I can buy 18 chickens but I'll wait until after winter".

The first form of money was coins made of precious metals like gold, silver and copper. The Spanish & Mexicans were the last successful countries to use precious metal coinage. It went something like: 1 gold doubloon = 2 gold escudo = 4 silver dollars = 32 silver reals. From the late 18th century, Spanish & Mexican dollars became the first global trading currency and was used from England to India, Malaya and Australia.

For bigger transactions, the banks invented the "promissory note". This was a note of paper saying something like "I promise to pay the Bearer the sum of One Pound Sterling" (silver). That note was worth one pound of silver and you could you could go to a bank to exchange the note for silver and vice-versa. This was the beginning of paper money.

In the beginning, Promissory Notes were issued by banks. This role was taken-over by the Treasuries of the countries, issuing what we now call "currency" based on the value of gold, called the "gold standard".

After WW2, the Breton Woods system was introduced to regulate the international exchange of currencies, ie how to value currency exchange between countries.

In the early 70's, the gold standard was abandoned for the "fiat money" system. Basically, the Treasury of a country issues as much currency as it wants and they will tell you what it is worth; fiat = "because I said so".

In your home country, you have a home currency (which you need for some basic investments). If you have a back-up country, then you also have a back-up currency. You may or may not want to have investments in another currency as this introduces currency-risk. At any one time, the value of currencies fluctuate. But if you want to buy say, Euro Corporate Bonds, it is traded in Euros. If you want to buy say, US Treasury Bonds, it is traded in US Dollars.

Listed below are the most traded currencies in the world:-

USD - US Dollar - USD represents 44% of all trade in the world. The dominance of the USD is partly due to its economy but also because commodities are traded in USD and because most central banks are holding USD as reserve.

EUR - Euro - EUR represents 16% of all trade. EUR is driven by its economy of manufacturing and agriculture. It is also held by central banks as reserve.

JPY - Japan Yen - JPY represents 11% of all trade. Its economy is driven by manufacturing. JPY is used as a "Proxy" (approximation) for the pan-Pacific nations' economies.

GBP - UK Pound - GBP represents 6½%. GBP is still a central bank reserve favourite but waning.

AUD - Australia Dollar - AUD is 3½%. Economy is commodities; mainly metal ores, oil & agriculture. Its main customer is China.

CAD - Canada Dollar - CAD is 2½%. Economy is driven by commodities; mainly oil, precious metals & minerals.

CHF - Switzerland Franc - CHF is 2½%. Until 2011, it was "Pegged" (central bank adjusted) to gold. Now, it trends with EUR

Alternative currencies to consider:-

SGD - Singapore Dollar - SGD is a good "Proxy" for USD

SEK - Sweden Krona - SEK economy is based on high-tech & timber.

NOK - Norway Krone - NOK economy is based on oil.

NZD - New Zealand Dollar - NZD is based on agriculture.

Sometimes Central Banks do things which will consequently devalue their currency. Examples are High Inflation & "Quantitative Easing". High Inflation just means things (in that country) will cost more in the future, so your money is worth less (it can buy less). "Quantitative Easing" works like this: the Central Bank issues a bond (IOU note) to borrow money from investors; it then prints more money to buy back (pay off) those bonds; it can do so by reason of "because I said so". A country which prints money with no economic basis will basically devalue the currency.

When countries have actions that devalue their currency, investors will move their money to a proxy currency. Or they will move to an alternative currency which is independent of these problems.

Inflation & Tax in Countries

Investment is meant to give a total return at the end of a given period. This total return is reduced by Taxes and Inflation.

When investing in any country, you need to consider their inflation rate and their tax laws.

Inflation is where the price of everyday items becomes more expensive over time. If you have $100 now, you can purchase $100 of items now. If the inflation rate is 10% for the year, then, at the end of the year, those same items would cost $110. Basically over time, inflation will devalue (reduce the value of) your money.

Taxes are an inevitable cost that needs to be paid, for making money. Typically, there are 3 types of "making money" and each have their relevant tax. "Earned Income" is money earned from employment. "Unearned Income" is profit from things like deposits, rental, loans etc. "Capital Gains" is profit made from the disposal of assets, eg bonds, shares, property. Most countries will have a separate category for "Real Property Gains Tax".

While we can look at Taxes as a known cost of doing investments (in a country), Inflation can be unpredictable, even in the long term. When the government prints more money, that inflation is paid for by savers (people who save money) because their money (savings) buys less things in the future. While changes in taxes need to go through a budget process in Parliament, the printing of money does not.

[Left: Historical Inflation Rate by Year - 1956 to 2019 - USA Annual rate of inflation as measured by the Consumer Price Index -source Macrotrends]

Looking at the chart, rampant inflation of more than 10% happened after the early 70's. After abandoning the gold standard, the US Central Bank went on a printing spree. It wasn't until the mid-80's that inflation was under control. Currently, we are in a period of fairly low inflation.

Interest Rates & Fixed Deposits

Financial "Interest" is the amount a Lender charges a Borrower for the use of their (the Lender's) money.

When a Saver puts their money in a Bank, the Saver is the lender and the Bank is the borrower. The bank will pay a "savings interest rate" on the money. When a Bank lends this money to a Borrower, the borrower will pay a "borrowings interest rate" on the money. There is a small difference between the borrowings-rate and the savings-rate, which the bank keeps as profit.

A Fixed Deposit is where a saver promises to keep their money at a bank for a fixed amount of time, in exchange for a slightly better interest rate than savings.

Fixed Deposits are regarded as the safest investment because the Principal and Interest is guaranteed by the Bank. In some countries, a certain amount of the Principal is also guaranteed by the government in the event that the bank has problems repaying.

Because fixed deposits are considered to be risk-free, in traditional thinking for investments, fixed deposits would constitute the bulk of a portfolio.

[Left: Federal Funds Rate - Historical Chart - 1954 to 2019 - The fed funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight, on an uncollateralized basis. -source MacroTrends]

Looking at the chart, it is probably not surprising that the Interest Rate is always adjusted to take into account the Inflation Rate. If not, there would be no reason for saving money as that money just disintegrates in value over time. Currently, we are in a prolonged period of near-zero Interest Rate, which has not really happened before.

With Interest Rate at near-zero, all the traditional methods of investment do not apply and portfolio planning has to be re-thought out.

Earnings Rates, P/E Ratios & Compounding

A lot of financial jargon refers to mostly the same handful of mathematics.

Earnings Rate = Earnings ÷ Amount Paid -or- Yield ÷ Investment Cost -or- Interest ÷ Principal

Eg. Principal of $1000 with a Yield of $140 means an Earnings Rate of 14% [as 140/1000]. You earn 14% every year.

It's all the same thing mathematically. Earnings Rate = Dividend Rate = Interest Rate : It all depends on which investment we are talking about; it's all the same calculation.

P/E Ratio (Price -to- Earnings Ratio) is the inverse of Earnings Rate.

Mathematically P/E Ratio = Amount Paid ÷ Amount Earned -or- Investment Cost ÷ Yield -or- Principal ÷ Interest earned.

Eg. Principal of $1000 with a Yield of $140 means a P/E Ratio of about 7 [as 1000/140]. You recover your Investment Cost in 7 years.

Financial information often interchange between these numbers and you are expected to know these simple calculations and their inverse (in rough calculations anyway). For example:-

- Earnings Rate = 3%, 4%, 5%, 6%, 7%, 8%, 9%, 10%, 11%, 12½%, 14%, 17%, 20% - P/E Ratio = 33, 25, 20, 17, 14, 12½, 11, 10, 9, 8, 7, 6, 5.

The P/E Ratio tell you how many years it takes to recover your Principal. So far we are only dealing with Simple Interest.

Compounding is where the Principal and Yield is combined to be the "new Principal" in the next cycle.

Example: A Fixed Deposit has 10% interest rate. You invest $100 Principal now. After year-1, you get $110.

For year-2, you invest the $110. After year-2, you get $121.

For year-3, you invest the $121. After year-3, you get $133.

For year-4, you invest the $133. After year-4, you get $146.

Basically, compounded investments have accelerated returns.

- Compounded Rate = 2%, 3%, 4%, 5%, 6%, 7%, 8%, 9%, 10% - Years to recover = 36, 25, 19, 16, 13, 12, 10, 9, 8½

Looking at investment products, Fixed Deposits will have an option to "add back to principal" or "roll over" which allows you to compounds the earnings.

Real Estate Property

Real Estate Property is such a specialised subject that it is considered not as a financial product but a product category of its own. Property is a real tangible asset with real value and usefulness; and (unlike financial products) is not subject to the whims of inflation. It is measured in square metres and not money.

Property is a very long term investment and, if properly assessed before purchase, should maintain a steady "capital appreciation" (growth in value) with very little risk. The growth in value (increase in price) is guaranteed because the amount of land in the world does not change (supply is fixed) while the population is growing (demand is increasing).

Real Estate Property requires quite large investment depending on its size. For most people, buying their home will be the largest investment they will make. The primary concern in selection of property must be choosing one which (you feel confident) will not diminish in value. In the market, there will be some which are priced high and some that are priced low (within reason) but, since the investment tenure will be a very long period of time, always select a less risky property and be prepared to pay the premium.

Rental varies from country to country. When renting to outsiders, you take on the responsibility of collecting the rental and the risk of "wear & tear" on the property. The rental rate is a mirror of the bank's mortgage rate which follows the interest rate. In the 70's & 80's, rental used to be a main factor in selecting properties as you would get an annual rental "Return Rate on Investment" of 10%. Nowadays, with interest rates at 3%, monthly rental is a less important factor.

When you own and occupy a property, the phrase used is you are "sitting on" your investment. "Sitting on it" is a good thing because you have chosen a prime piece of real estate which (a) you are happy with, (b) will not diminish in value, (c) will grow in value outpacing inflation, and (d) you have no pressure to sell. If you've ever wondered why some rich people choose to live on unnecessarily huge pieces of land, it's because they are "sitting on" their investment.

Real Estate Property can be sub-categorised into (a) Agricultural, (b) Residential, and (c) Commercial. The same principles and choices apply to all three: (1) Assess the risk when you select the location, and (2) Determine if it is to be self-occupied -or- rented out.

Treasuries & Bonds

Bonds are basically Loans where the borrower promises to make regular interest payments as well as return of the Principal amount at the end.

Treasury Bonds (ie Treasuries) are issued by the Central Bank (ie the government of a country). This is considered to be a very safe investment but the interest rates may not be so attractive.

Corporate Bonds are issued by Corporations. Depending on the corporation, they have different risks and interest rates.

Treasuries & Bonds (like Fixed Deposits) are good for planning fixed income streams.

Equity Shares, Unit Trusts & Dividends

Equity Shares refer to Shares in a Company (Corporation). They can be "listed" or "unlisted".

Listed Shares are shares in a Public Listed Company (PLC). Listed Shares are traded on a freely traded on a "Stock Exchange". The price of Listed Shares is determined by market forces. Listed Shares are generally seen to be risky but liquid.

Unlisted Shares are shares in a Private Company. The buying & selling of these share are restricted by a slower process involving the permission of the other shareholders. Private shares are usually not in the scope of investors.

Companies are valued by their Net Total Assets (NTA). The calculation is all their Assets minus all their Liabilities. The Share Value (ie value per share) is the NTA divided by number of shares. Let's say Company-X has a value of $50,000 and has 10,000 shares; so the Share Value is $5 (per share).

When companies are profitable, they sometimes pay out Dividends to their shareholders. Companies are not obliged to pay Dividends. This tends to be a "management style" to reward shareholders for investing.

In theory, the Price (per share) should be the NTA (per share) plus the Dividend (per share). This is sometimes referred to as the "Fair Price". However, the "Market Price" can significantly vary from the Fair Price. The reasons for the difference are (1) the market is driven by expectation, and (2) the market consists not only of logical investors but speculators and punters too. Expectation can have some elements of sentiment and emotion which affects the price. The variance between the Fair Price and Market Price is how we determine how risk... Volatility = Risk.

Generally, the return on investment for Listed Shares is the Disposal Profit and any Dividends received. Disposal Profit is the Selling Amount minus the Buying Amount.

Unit-Trusts are a basket of Listed Shares which are pooled together and sold in smaller units. They are managed by the Unit-Trust Managers. They will handle the day-to-day monitoring of companies' market movements. Because it is a basket of shares, the risk is diversified over many companies. In theory, the risk exposure in Unit Trusts is the "market risk" with much reduced volatility of any one single company.

The Unit-Trust Managers will charge a small fee for their work, usually upon selling the Unit-Trust. There are usually have a few different "styles" of Unit-Trusts: "Growth Funds" buy shares of companies with Asset growth; "Income Funds" buy shares of companies with regular profit.

Personal Loans & Private Deals

When you invest in Treasuries, you are loaning your money to the government. When you put money into your Savings account or Fixed Deposits, you are loaning your money to a bank. When you invest in (public-listed) Corporate Bonds or Equity Shares, you are buying a tradable stock on a stock exchange. Public Listed Companies and Banks have heavy compliance regulations which are to protect the investor.

- "Personal Loans" refer to unregulated loans (without protection for the investor).

- "Private Deals" refer to unregulated investment offers (without protection).

These could be to family, friends, acquaintances or even companies. Again, the assessment has to be in terms of return -vs- risk.

When you receive a request for a personal loan or an offer to invest into a private deal, that request or offer has probably been rejected by every bank or corporate investment committee before presenting to you. In general, this means it is a highly risky venture.

In general, your reply to these requests or offers should be just "No". However, there may be exceptions to consider.

(a) Conscience - Giving a loan is the quickest way to end a friendship. But this could be a family member or old friend in desperate need. Perhaps you feel a duty or obligation to help. Perhaps the amount is not significant. In this case, treat it as a charity; give the money, set some easy payment terms, don't expect the money back. Keep your sanity and friendship (it is worth more).

(b) Asset value overwhelms Risk - Typically, this would be a company which has a lot of assets but no cash (liquidity). Typically, your answer should still be "No" but if you know the company well, your assessment is as follows (a) add up all the assets which are unsecured (not charged to a bank or lender), (b) only offer to loan the amount of one-seventh of the unsecured assets total, and (c) get legal firm to charge those assets to your loan (ie you get the assets if they don't repay). Example: If the total uncharged assets value = $700,000, then the loan amount = $100,000. Basically, you are asking for 7 times the loan value as your security. The reasoning is as follows: Your loan is 1/7; they say asset is 7/7; market value is likely 5/7; forced sale value is only 3/7; tied up in court for 5 years with legal fees... You might break even with 1/7. At least here, the risk is factored-in as security.

Long Cycle of Boom & Bust

At any one time, the market price in a stock exchange is a reflection of the economy and the credit conditions. The well-being of an economy is real growth in whatever economic sector: Industry, manufacturing, services or agriculture. Credit conditions are about ease of obtaining access to loans and borrowings.

In the long run, every cycle of the stock market's boom & bust looks the same. During the bust, the asset prices are low. The prices stay low for a while and then start to slowly rise. Once the asset prices start to rise, they continue a slow rise over long period. This is boom time. All the investors, speculators and punters are making money. They continue to throw money into trading assets. The prices still rise; and rise; and rise. Until the prices are no longer sustainable. And then the recession hits; the prices fall incredibly quickly and it's bust again.

[Left: Dow Jones Industrial Average (DJIA) stock market index - 1954 to 2019. Historical data is inflation-adjusted (by CPI). Grey bands denote recession periods. -source MacroTrends]

Buy low, sell high. We don't know when "low" is really low as prices could fall further. We don't know when "high is really high as prices could rise further. But there is still the guide of NTA per share or the Fair Price.

As a long term investor, you can "wait and see". Likely in a bust period, you will be able to buy, not at the lowest, but at a fairly low price. During the boom, the highest price is just before the bust, therefore it is a risky time. Likely in a boom period, you will not take the risk of waiting for the highest price, but be content at a medium-high price.

The boom & bust cycle is partly predictable in behaviour because the "market" is generally competitive; with lots of investors and players. If a market is not competitive enough, then market moves at the whim of the "big money". For example, a large number of Institutional Buyers can influence or "move" the market prices as they see fit.

[Left: Crude Oil Prices - 1952 to 2019 - The price of oil shown is adjusted for inflation CPI and is shown on a logarithmic scale -source MacroTrends]

(see chart above) The Crude oil industry is not a competitive market. There are only a handful of government-related companies and they collude to form cartels. As such, the price of crude-oil is unpredictable and easily influenced by political powers. Industries with monopolies are just something to be aware of.

Getting Financial information

A lot of financial news can be found on the internet. It's worth glancing at the headlines to get an idea of what is important to the people in the financial world. This is basically to monitor the state of the economy, interest rates, political troubles and who is doing well financially.

I recommend using Google News which requires you to have a Google Account. You can either download the Google News app or use a browser using http://news.google.com . From here, you basically fill up your "Favourites" with "News Sources" which are relevant. You will have to do a Search for them and mark them as "favourite" by clicking the "star".

Recommended News Sources + any relevant "tabs"

Bloomberg + General, Markets

CNBC

Reuters + Top News, Business

Associated Press (AP) + Top News, Business

The Economist

Financial Times (FT) - Front Page, Markets

DW [Deutsche Welle] (english) + Top Stories, Business

France 24 (english) + World, Business/Tech

Some of these Sources require a subscription or registration to read the news articles. If you're glancing through headines, you don't need to subscribe. The above news-sources cover general World news plus US, UK and Europe business news.

Being Inconspicuous

Everybody is an expert investor. Everybody was really clever when they made money but blame bad luck when they lost money. They also have the latest tips, gossip and conspiracy theories about the financial world.

This is why you do not tell other people you do investments. They will have the wrong idea and time horizon. And they will continuously bother you. It's not anybody's fault. They just think that you are exactly the same as them.

Be inconspicuous. Do not tell anyone about what you have invested in. Ask a lot, reveal little.

Going in Alone

Long-Term Investors tend to buy when when there is a recession and they tend to sell when there is a boom. Buy low, sell high. Although buying during a recession makes perfect sense, you will feel alone because all the other investors and punters are running away at that time.

In reality, there will be other long-term investors going in at the same time... but they're all inconspicuous like you. That is also the time when the Institutional Investors come in. Institutional Investors include all the Pension Funds, Insurance Funds, Unit Trusts, Government Funds. They invest in very large amounts.

But, to a large extent, you will feel as if you are alone. As such you can't afford to be the extrovert who celebrates every profit; nor the introvert who curses every loss. There are decisions to be made and there will be consequences. Hopefully, they are mostly profits but a few losses are unavoidable. It's all part of managing risk.

The strategy is to minimise risk by diversification and averaging over a long term. The diversification might only be 7 selected assets of value and quality. The portfolio will evolve over time to adjust for buying opportunities like during a recession. Over the long term, the profit & losses average out and we are just looking at growth in value.