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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