Money and its growth: A thought

To begin with, to grow our money is not something that requires penetration of dark mysteries or the gift of gnostic enlightenment. The first key is simply to prevent ourselves from being blinded by simple human greed and/or an unhealthy emotional thrall to the power of money and/or the unthinking conformity to the economic behavior of friends/family--'The blind cannot lead the blind'. After detaching yourself and clearing matters up a little, it is then important to cultivate a genuine interest in money and its associated matters--especially matters related to investment. You must be positive about money and seek to clearly understand its nature, operations and powers. A lot of people seek more money, but how many care about its laws and properties? We idolise money, but we do not respect it enough to learn about it.

Financial knowledge is the key to wealth. No matter what your starting income base is or your regular monthly income ((though I assume you have at least some surplus above subsistence), the only way to even protect your money's value (not to mention grow it) is to learn about the basic arts of investment. For as most of you may know, money tends to lose its exchange value over time because of the inflation of prices. To keep up with inflation is the most basic justification of investment.

Another thing: to attain true financial literacy, one should never seek to follow financial gurus and rich dads blindly. The best policy to peruse the problem of money growth from all angles. One should compare and contrast the approaches of stock investors like say, Warren Buffett and Peter Lynch, with entreprenuers like Bill Gates and Michael Dell, with real estate giants like Li Ka-Shing and Donald Trump. Richer folks will also need to cast a glance at the world of forex and its intricacies (either for direct speculation or during foreign investments). Indeed, I genuinely wonder why no educational system in the world seems to provide an all-important course in financial literacy and let most of our students stumble along with the most primitive of economic beliefs. Perhaps it is a conspiracy to support Singapore Pools ? =)

Once you have obtained some basic financial and investment knowledge, the next step is of course to start applying them to investing some of your surplus wealth.

Among many tricks and guidelines, I think one should always remember an important law of investment: Returns are usually proportional to risk. Typically, if you want a fast buck, (i.e. higher returns over shorter time) you must risk losing more than someone who is willing to settle for a lower profits ceteris paribus. This is however NOT an absolute law. Knowledge of the market or the business/commodity in question can reduce risk without affecting returns. Institutional level investors may also attempt to make their knowledge certain by driving the market up and down with their resources or through illegal means. Regardless, the relationship between knowledge, risk and returns should be kept in mind, whether the investment in question is one's own business, public company equity, real estate or bonds. If one seek higher returns without higher risks, one must dramatically improve one's knowledge of the investment and the relevant market conditions. If that is not possible, as said before, one must simply be satisfied with lesser returns.

It is the standard Golden Goose teaching. Better one golden egg everyday instead of one dead goose. Thus the person in question can forgo risky options like setting up their own businesses or investing in equities (stocks). Instead he may put some into fixed deposits (which may keep up with inflation) of banks or insurance companies. A reasonably safe alternative is to buy government bonds (basically to lend money to governments) or to invest in a money market fund (such as Merrill Lynch's. These invest in bonds for you). These can also offer returns slightly above inflation-- though I am a little paranoid about the stability of the US government, which is the largest supplier of bonds (US Treasury Bonds). Personally, I will go for European or British bonds, though my knowledge of that is very limited as yet.

Yet the best 'safe' investment is probably real estate (though usually more unsafe than fixed deposits, bonds and money market funds). Perhaps a good majority of even the financially illiterate do make substantial gains from the house they live in, so long as the general economy is posing some moderate growth. That is of course you are not chasing a big bubble. In any case, unlike things like stocks or your own business, even if the price of the house drops precipitiously, you still have the house. Here it is wise to appreciate this wonderful economic concept of practical value VS. exchange value. Things like water and air have great practical value, i.e. they are very useful, but they are of very little exchange value, i.e. they can exchange for very little; put it another way, their price is very low.

A house retains its practical value even if (touch wood) its exchange value plunges into an abyss.
That alone more or less makes it much more 'safe' than equities or things like gold. Appreciate that gold is hardly very useful (very little practical value). Its value, like that of paper money, consists of exchange value. It plunges and that is the end of you. That, by the way, is another reason why hoarding cash in your piggy bank is a VERY bad idea.

Anyway, this blog is too long. I shall talk about higher risk investments in another blog.