1.1: What Is an Investment?

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Video - Audio - YouTube - Presentation File - Study Guide

“In investing money, the amount of interest you want should depend upon on whether you want to eat well or sleep well.”
-- J. Kenfield Morley

Welcome to Introduction to Investments. Do you want to be a successful investor? You can. You do not need any prior investment experience to take this class. You don’t have to be a genius or a technology whiz. There is no advanced math, only simple arithmetic that any 99¢ calculator can perform, addition, subtraction, division, and multiplication. The concepts, techniques, and skills, while extensive at times, are not difficult. The research is relatively painless. As the famed investor, Mr. Warren Buffett, has been quoted as saying, “Investing is simple … but it ain’t easy.” What? Why? How? Mr. Buffett is referring to the fact that there are two parts to the world of investments. The simple part is the intellectual part, the cognitive part. Read, listen, watch, study the material, spend some time doing the research and the assignments, and you should find that the concepts, techniques, and skills are actually very straightforward. The “ain’t easy” part is the emotional part of investing. We will spend a great deal of time doing our best to help you learn techniques, tricks, and tips that should help you succeed with the emotional part, but again, as Mr. Buffett says, “it ain’t easy!”

Mr. J. Kenfield Morley encapsulates our predicament perfectly. “In investing money, the amount of interest you want should depend upon on whether you want to eat well or sleep well.” If we may be so bold as to suggest a better rendition of this timeless advice, we would ask Mr. Morley to substitute the word reward for his choice of the word interest. Interest is just one type of investment reward; there are others. Nevertheless, the meaning shines through brilliantly. As we are introduced to the many investment choices, we are going to see that some of the choices will help us eat well. Some others will allow us to sleep well. However, there aren’t any choices that can do both. Take heart! We will learn some techniques that should allow us to eat reasonably well and sleep reasonably well but as we will say over and over and over again, “There ain’t no guarantees!”

Investing versus Speculating/Trading

We are going to introduce a distinction here that will run through our journey together. Do you want to be an investor or do you want to be a speculator, also known as a trader? Becoming an investor is something that we can definitely help you with. You will learn the most important and most popular investment alternatives. You will learn the types of rewards we can expect from each and the levels of risks that we will have to accept to receive these rewards. We will also cover some important techniques and skills to help us deal with these risks. We will learn that building wealth through investments is a long-term process; it does not happen overnight. We can help you become a prudent, long-term investor. However, if you want to become a speculator or a trader and earn tremendous amounts of money quickly, then we are sorry to say that you will be very disappointed in this class. We are not able to help you to become a speculator or trader. Our sincerest apologies.

So let’s get started. We start from the very beginning with a simple question: What is an investment? There are many definitions available. Here is the definition we will use in our class:

An investment is any vehicle into which resources can be placed with the expectation that it will generate positive income, or that its value will be preserved or increased, or both.

For the vast majority of us, the resources placed will be dollars, typically from our work-related income. There are many investment vehicles and, as mentioned, we will cover the most popular alternatives. We see that there are a few goals that we might seek with regard to our investments. One goal is to generate positive income, also known as cash flow. Another goal is to increase the value of our investment, also known as capital appreciation. At the very least, we want to preserve the value of our investments over the long term. Lastly, we could also seek both goals of cash flow and capital appreciation. As we introduce each investment alternative, we will discuss the goals associated with each investment alternative and the risks that each carries.

Here is another important definition that revisits our distinction of being an investor or a speculator/trader:

“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.” – Benjamin Graham

This definition, Dear Readers, is very near and dear to Your Humble Author’s heart. This quote is from The Intelligent Investor, written by Mr. Benjamin Graham. Mr. Graham was Mr. Warren Buffett’s teacher and mentor. Eventually you will want to read The Intelligent Investor. (Don’t read it as your first book! There are better books to read as your first book on investing. Please see the Bibliography for which books you should read first.) We will return again and again to this definition. If nothing else, we want you to understand the difference between prudent investing for the long term and speculating/trading in the short term.

Mr. Buffett is famous for boiling down Mr. Graham’s concepts into very simple sayings. To illustrate this concept, Mr. Buffett famously said, “Rule #1: Don’t lose money. Rule #2: Never forget Rule #1.” Although we will see that investment values bounce up and down all the time, if you do your research and choose prudent, long-term investments that have done well over time and should continue to do well into the future ‒ and you don’t panic when the markets fall ‒ you won’t lose money in the long term^*. You won’t be a speculator/trader. You will be an investor.

We will now discuss various characteristics and attributes of the major investment alternatives.

^*Disclaimer: Please note that investment success is not guaranteed. If technologically based civilization cracks, falls, and dissolves into a pool of tears, then all bets are off. Of course, if that happens, you won't be worrying about your investments. You'll be joining the teeming masses digging for beetle grubs and boiling bark for dinner. Personally, I don't believe this is going to happen any time soon. I am very optimistic. Failure is not an option. But the truth is that nobody knows what the future will bring. Oh, well.

We will now discuss various characteristics and attributes of the major investment alternatives.