Did the title attract your attention?
But I will disappoint a lot of people with the rest of this post as I am not going to share any money making opportunity. However, it may save you a potential loss of money if it can help you understand our human weakness – greed. I cheekily use 4 levels of investment sophistication to attempt to illustrate this human instinct that is detrimental to investing and how we can overcome it with increasing financial knowledge.
Level 0 investor – Submit to scams
The title of this post resonates with our desire to participate in rewarding ventures that require little or no effort at all. Without any financial knowledge and know-how, level 0 investors are ignorant and gullible. Without the financial knowledge to keep their greed in check and to warn them that there is no free lunch in this world, they are susceptible to investment scams. Conman thrives on this weakness. As long as humans nature do not change and not financially savvy, investment scams will occur again and again with a different story each time.
[Free Ebook] How should you invest your first $20,000?
We asked 14 Singapore finance bloggers to share what they would do if they could go back in time and invest their first $20,000. They can no longer rewind time, but you can learn from their experience and hopefully start with a better footing.
Level 1 investor – Follow stock tips
Level 1 investors may not believe in scams and they know that buying stocks is probably safer than unconventional investment schemes. The problem is they believe in stock tips. They want to earn profits and grow their money but they do not want to put in the effort to learn and understand investment. I noticed during investment seminars, the common questions posed are “what do you think of this stock xxx?” or “can you recommend some stocks?” Also in investment forums, the most active section is often the stocks discussion section where different people share their opinions on certain stocks. Instead of using these discussions as a lead to start one’s research, they use it as genuine stock tips. Some of them would even buy the stocks without fully understanding what the company actually do.
Level 2 investor – Follow the experts
Level 2 investor understands it is dangerous to listen to tips and more often than not, the tips wold not work in their favor. They do not engage in coffeeshop talk about stocks, but follow more reputable sources of information like leading financial news, gurus, analysts reports, etc. Let’s not even challenge the accuracy of these information and its timeliness. The problem with level 2 investors is that they will still invest when the story is convincing, without them knowing enough of a particular industry or country. Doesn’t mean if George Soros made a lot of money in forex, you must also do forex. Doesn’t mean Jim Rogers invest in Africa means you have to invest in Africa. Even if they are reputable investors, level 2 investors do not have the complete information on how the gurus get in and out. What are the things to look out for so that the risk is worth taking and well managed. You simply do not understand enough to make a good financial decision.
Level 3 investor – Invest in what he knows
We should be level 3 investors. Level 3 investors understand the importance to invest within their circle of competency. Such simple truths are easy to understand but hard to put into practice. It is always alluring to listen to the next great story and buy into it. But level 3 investors are able to keep their greed in check.
It is possible for the level 3 investors to discover good stocks during their course of work. They may get to know certain suppliers, contractors, and clients very well. These interactions and intimacy give an edge over other investors in the market. They would also know the strength and health of the industry and if any big development is undergoing that would have a great positive impact in the future. Since you spend time and energy at least 5 days a week in your job, you should use it to your advantage. Be more observant and inquisitive and you may find a few potential stocks.
Another area to be inquisitive about is the products and services that you often use. You have a deeper understanding about these products and services. There must be a reason why you keep going back to them and give them business. Would you be able to dig a little deeper to see if there are any potential to invest in them?
I will stop at just level 3 to keep it simple. As a retail investor managing your own money, you can already make a lot of money as a level 3 investor. You do not need to be dabbling in derivatives or force yourself to understand another industry. It cannot be emphasized enough to invest in what you understand. Many times, we are lured by greed which motivates us with a belief that there is a pot of gold at the end of it. You must say no to such opportunities when you don’t understand them enough even though it may be difficult to resist.