Many readers ask investment related questions, among them: “Do you advise that I can invest in get-rich quick schemes?” or “I have Shs10 million, what business do you advise me to start?” In order to forestall another investment advisory question, I am changing tact in this article to share my top investment tips.
Buy to make money
There is a common fallacy that people make money when they sell their investment assets. This thinking assumes that investment income is simply a matter of luck, which is not the case. In investments the decision made at the point of acquiring an asset is the most important.
Whatever your investment asset you have got to learn how to tell when an asset is undervalued before the rest of the market realises the fact. As an investor you need to learn to buy at a low price and sell high.
To illustrate the point of making money at the time of buying, let us look at the example of John who bought three plots of land in the suburb of a growing town.
Soon after John bought the land, a World Bank funded project to pave the town roads was launched and the dirt road leading to the three plots suddenly became part of the best 10 km of the road in the town.
Prospective real estate developers started asking John to sell his land to them. Eventually John sold one plot for the price he had paid for the three pieces. The threefold profit that John earned from the sale of his plot of land was in fact made possible by his
buying a lucrative piece of land at a time when many people did not give it a second thought.
When people make the statement “when you invest in such and such you will never go wrong” it is a clear sign that they are making assumptions. When an investor overly relies on assumptions the end result is often a loss or failed investment.
Making assumptions prevents people from honestly assessing risks associated with proposed or ongoing investments. One time a business lady borrowed some money from a moneylender at an interest rate of 10 per cent.
After two months when she did not receive any payment on the loan, the moneylender asked the borrower why she had not made any payment. It was at that time that the trader realised that the interest rate was 10 per cent per month and compounded and not 10 per cent per annum as she had assumed.
In order to avoid relying on assumptions, you should not believe what you have been told without cross checking the facts.
Jane invested in crop farming and the workers told her that the land that had been planted with crop measured 10 acres. All the expenses that Jane incurred; from ploughing land, purchasing seeds and fertilisers, planting, weeding and harvesting were based on the assumption that the land measured 10 acres.
Surprising, Jane did not even know what an acre meant in terms of measurement. One time a colleague helped Jane to measure her farmland and discovered the land size was only six acres.
None of the labourers could explain what became of the inputs that were intended to be used on the additional four acres, but they had been bought and used.
Another dangerous aspect of assumption is when a person thinks they know yet the truth is that they do not know. That kind of assumption makes people to shun experts that could have helped to ensure success for the investment.
My last tip is that for a start-up investor the ability to focus is more important than diversification.
It is surprising that the very people who complain that they do not have enough time and money to invest go on to engage in three or four enterprises at a go.
Apart from using the little available money and time to achieve tangible results, focus also enables building of skills or expertise in a particular field.