Friday, October 13, 2017

What Is A Good Investment?

I received an interesting email today from a reader who surprises me with a very basic yet intriguely mind stimulating question.

He asked me what makes a good investment. I had to think a while before replying him and thought it'll be a good point for discussion. 

A good investment in my definition is something in the future that you can derive a greater value than what was invested in the beginning. The key word there is "greater value" and this aspect can be both known or unknown.

One example of a "known" aspect is putting your money in a triple A credit rating government bond or in the local context the Singapore Savings Bond (SSB)  for instance,  which yields investors a return of about 1.2% to 2%. What this means is if you put $10,000 today,  this amount will grow to more than $10,000 sometime in the future with a very high known probability. 

The other example of an unknown aspect is putting our children to school. Now,  we know that with all the rising school fees and the additional tuition costs it isn't easy to raise a kid.  In fact,  so many parents follow the traditional norm these days that it is taken for granted that education is a known aspect of good investment.  We know that isn't necessarily true but many people still view it that way. 

In the stock market arena,  a good investment doesn't have to be a good company as well. 

Buying and identifying a good company isn't the hardest part of investing. We all know the supposedly good companies. In fact,  one google search of the top 10 market cap in the world is all it takes for me to identify the good companies. What is difficult about investing is assigning a valuation to these companies and buying them below what they are worth. Buying good companies can turn into a poor investment if we are complacent. 

On the contrary, a good investment can also be buying distressed companies far below what's their worth.  In fact,  we see this all the time with corporate m&a and buyback.  The underlying reason is similar in nature. Buying a distressed company can turn out to be a good investment. So to those people who thinks that buying a sunset company like SPH "will surely" lose money, it may not be the case. 

Does a good investment means you need to buy something that is fanciful? Let me think for a second what are the hot in right now.

What about cryptocurrency in the form of bitcoin?  Does making money from a popular investment is a better investment than making money in a pillow strategy? I am not suggesting investing in bitcoin is a bad idea.  In fact,  it can be one of the best investment if the world is using them eventually.  We just don't know it yet at this point. 

So going back to the reader who emailed me, these are basically my thoughts on the topic. I don't think all of us have to agree with one another just because we are the same species but the human mind is so different and diverse. You would have your very own definition that forms your thoughts and strategies. 

I'd like to ask the readers.  What is your definition of a good investment? Does it have to come with a particular set of rules, time horizon or anything like that? 

Thanks for reading.

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  1. Hi,

    IMHO a good investment will be able to minimise downside risk and trend towards profitability. No matter what, what you invest in must be able to achieve earnings in a consistent manner.

    I favour simple companies that are advocated be Peter Lynch / Warren Buffet. Simple yet possessing strong fundamentals. Investing can be a very greed and fear driven journey and it is better to stick to what you understand and know. IMO buying a good investment is not the difficult part, but projecting the future and deciding when to buy / sell is the hardest.

    1. Hi INTJ

      I like what you said in the first paragraph. Able to achieve returns in a consistent manner means that your strategies is working and suitable to your own needs which is utmost importance.

  2. Good or bad investment is proven by time in the market as we cannot forecast the future too far way.

    1. Hi Uncle CW

      On hindsight after closing the position, we only know if its after all a good decision or not haha

  3. People always define good investments ex post.

    However we can only make investments ex ante.

    So more important to develop solid investment process & ability to manage along the way.

  4. B,

    What makes a good investment?

    Anything that brings money into my pocket!


    1. Hi SMOL

      Haha, if pocket full then how? :D

  5. I think good investment is a process not a destination. Good investment is a journey which generates consistent return to our portfolio and beats the index. Our assessment to the investment must be based on quantitative and or qualitative measures to identify it, based on our temperament.
    According to Warren Buffet, the real big money tends to be made by investors who are right on qualitative decisions but the more sure money tends to be made by investors who are right on quantitative decisions.
    Business acumen maybe required by investors who wish to have outstanding or above average investment returns. Just my humle opinion.

    1. Thanks for sharing.

      Agree on the process part which brings about a correct decision at the end. That will be the ultimate goal. Lose money may not mean its a bad investment if we can take away lessons learnt from it.

  6. Very good article. Good investments give great returns. May I interest any one in passive income opportunities. Check these links

  7. Good investment is a adjective with a noun.

    So good investment is a happy choice that makes. Me more money!! Yeh !!

    1. Quote : "So good investment is a happy choice that makes. Me more money!! Yeh !!"

      Only time in the market will prove that you either made more money or lose more money. hee hee!

      So what is the message to all retail investors?

    2. Lol.

      Nope. If u want to push it that far. Only death will tell if u make more or less. Since before we die, we might still touch investments LOL

    3. Haha yeah I think thats not the point really. I think a good investment doesnt totally have to do with positive returns. Key word is totally.

  8. Good Investment by definition - the investment that provides you the returns you expected within the period you defined.

    Good investment by example - the investment that had already given you your expected returns. This is something that can only be defined with HINDSIGHT.

    Important: Paper gain is not actual gain.
    Important: Past trend does not guarantee future trend.
    Important: What's good to other doesn't mean it is good to you too.

  9. Good investment...i think depend on how much return we wish to generate.
    Some people parked their money in fixed deposit, earning 1 over % is considered good, others parked into blue chip and earned around 4% yield is considered satisfactory.
    Only those gifted with strong business acumen, gut, and passion in investing can really earn big consistently in stock market like 15% per annum.
    This also means not everyone can be good investor. Educated finance people like Degree or Master Degree in accounting are not guaranteed can be a good investor. They may be good technically in number, but they might not be good in real experiences of running a business as a business owner.
    So IMHO, good investment is a relative term depending on how we interpret it.

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