Early Investment Options

So you’ve landed your first job. Congratulations! After treating your friends and family to the best eatery your startup salary can afford, it is time to consider putting aside others cash. After all, you are never too young to start investing for the future. But while your trusty piggy bank and savings account can aid you in saving for the rainy days, it will take decades before you can put aside adequate to purchase your dream home. So maybe you need to learn how to invest as early as now so you can secure a comfortable life for yourself in the future.

Approaches to investment

I notice this guy in my office who disposed of a significant fixed asset and holds a GIANT sum of money right now! He's got that money saved up in a bank somewhere; and sleeps sound every night with a big grin on his face - the 'rich man' grin! And then there is this other guy; same office, same team! But he's got small sums collected here and there, and he keeps on fiddling among various investment opportunities. Some he floats up in share market while some he's sunk down on medium term-deposits on some 'trusted' finance companies and cooperatives that have blossomed in recent years; and soon, as the amounts size up, he plans to plough on the real estate and stock markets and stock some bullions for safekeeping. Immediate liquid safety is not the first priority, growing is.

I don’t think he sleeps with the ‘grin’ on his face and keeps battering his mind among alternate investment opportunities and the risks involved. But he is farming money, is proud of himself, and life is moving in a direction.

Successful Investors of the past

One cannot talk of early investments without having a mention of how Warren Buffet accumulated wealth of over 75 Lakhs (USD 90 thousand) by the time he was only a student in his high school. He sold newspapers, worked as a door-to-door salesman, worked in a grocery store. Early in his high-school, Mr. Buffet purchased a pinball game in partnership with a friend at $25 and put it in a barber shop. Within months, they were already owning several pinball games across many barber shops. The key point is, he SAVED what he earned, and ploughed back most of it, to keep his money growing.

Take Carlos Slim Helu for example. He is currently the richest man in the world! At the age of 71, he owns over 74 Billion Dollars. And he too started early. At the age of 12, when Mr. Helu had just migrated from Lebanon, he made his first lot of stock market investment in a Mexican Bank, from the money his father had given him to migrate to Mexico to avoid being recruited in the OTTOMAN Army. By the age of 26, Mr. Helu had already accumulated forty million dollars and focused most of his investments in the construction, real estate and mining business within Mexico.

Inflation

Let me redefine inflation for you. Inflation is time’s way of taxing you on your money. The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures. (Warren Buffet, 1977, Fortune Magazine).

The bottom line is, keeping your cash idle erodes it away at the rate of the economy’s inflation rates. This means, at the inflation rate of 9.6% for the year 2010, if you put your money in a fixed deposit at 12% in a bank and earn 11.4% (pay 0.6% in income taxes), your actual earnings is 11.4 minus 9.6 only. That is, by the end of the year, you have actually earned only 1.8% on your money. If inflation was higher than 11.4%, your money would actually erode away!

The fundamental learning for any investor is to ensure that the friction applied out of inflation does not exceed the returns you expect out of your investments. Inflation in Nepal was as high as 21% during 1992. Without anything else happening, people lost 21% of their wealth that year.

Risk and return

High returns usually come along with high risks. If such high return options had low risk associated with it, everybody would invest in them. When everybody invests in them, the returns would then be diluted and bring the returns down.

Early investors start with small sums. Initial savings are very precious, and one always looks to minimize the risks first, and focuses on the returns later. While it could be counterproductive to be greedy about big returns to begin with, but letting your money erode away with inflation should be equally troubling. It is a personal judgment for every single investor to make the right balance between the risk appetite and the return requirement at any point in time.

Price Fluctuations

Sometimes ‘active trading’ and investing become inter-changeable terms. For example, as you see the share price for a bank soar up, you buy them. But when they have already soared up, be clever enough to know this and sell it right off to buy another share that’s started to soar up. But this isnt’ that easy, and if it were, everybody would jump into it and make sure it became difficult!

But there are times when the whole share market is bearish and there aren’t any shares soaring up. This is the time to start investing somewhere else. Real estate for example, or gold and silver. While investments in local stock market and real estate has mostly got to do with the local economy, dealing and gold & silver mostly concerns the international market movements. This means, gold and silver trading and investments are independent of the national economic status and trends. In an economy like ours, such bullions become a safe bet.

Investment Options

There aren’t much investment opportunities floated in the Nepalese market as you would find in the International market. So the tips you may find online or the instruments you have studied in your business schools will sadly not come in handy when you consider investing here. And investment here does not mean starting up a business. It’s about using your small regular savings that you slowly accumulate to start growing based on where you put them. Here are a few examples to guide you through the options:

Bullions

The charm in gold and silver never fade away. Their values remain untarnished by the effects of inflation. Their values remain stable when the economy collapses or even when the national sovereignty is at stake. They sell across the international market and will continue to be valued for as long as mankind shall prevail.

Gold prices are seeing new heights and some say they’ve reached their peaks. But they said the same thing a decade ago. And they will continue to say the same thing in the coming decade as well. So don’t fret over the soaring prices, but keenly stand on the tip of your toes and watch out for price fluctuations. If you play right, your returns per annum could be as high as a 1000% (ten folds). But be careful, your losses too could accumulate to the same levels if you do not play right.

Stock market

Nepalese stock market is too small with too small a population controlling its major stakes. This is more troubling because all the theories you studied in your B-Schools do not work in such a scenario. Share prices here do not go down based on change of CEOs here. Neither do they change with bonus declaration trends or balance sheet figures. Such makes the stock market extremely difficult to predict and manage for the early investors. And with a limited number of stock brokers around, and you standing at the back of a line requesting a low value ticket sale/purchase, you fall far behind in the priority line.

The trick here is to buy and sell shares from your friends, families and work peers, instead of being dependant on the broker.

Insurance

Insurance is a safe call, not an investment plan. Even when an insurance company offers you a pension plan that requires over 25 years of disciplined commitment from you, the returns are much lower than what a savings account would provide you in that long a period. Besides, Insurance companies here earn out of their deposits in the banks and pass on a portion of that income back to you. If you simply see it from an investment perspective, it is always better to get rid of the mediating channel and deposit the sum sincerely and regularly – directly to your bank account.

But insurance keeps you disciplined. Keeps you assured of your family’s well being as well, should something happen to you. And if it’s a pension plan, it ensures you keep on receiving your cash flow even during the last days of your life. Afterall, you start thinking about investments at an early age because you want to improve your financial stability and sustain that financial strength to the last days of your lives. Of course the rate of returns is relatively lower here, but you run no risk here. Instead, it takes a lot of risk burdens off your shoulders.

Fixed Deposits

Fixed deposits are your savings, not investments. Just that these savings have a ‘lock’ feature for a certain period and thus provide you higher returns than on your savings account, but that don’t change the nature of this instrument. Here again, the rate of return is directly proportional to the amount of risk involved.

You may take up a local cooperative in your neighborhood, or a newly opened bank that offers a handsome return. But banks with high rates can only sell high-priced loans. Buyers of high priced loans are the risky businesses who wouldn’t be honored by cheaper banks because these banks have safer clients they can invest on. So your high-interest deposits are actually invested in high-risk businesses, and should these businesses fail, the institution you bank upon fails alongwith.

Commodity Exchange

There are quite a few commodity exchange houses that have come up in recent days. And just like you trade in shares and bullions, they allow you to trade in commodities. You would be dealing in certificates and not real rice grains and sugarcanes and whiskey and so forth. The theory here is simple: buy when it is cheap, sell when it is expensive, enjoy the difference. But knowing the right times to buy and sell is a riddle you can only gamble upon. This means, commodity exchange is an option for those of you who are looking for high returns and are willing to bet high risk on your hard earned savings.

But it is also for those who go the extra mile to study the commodity trends, do sincere exercises to examine the past trends, influencing variables and stay on top of current affairs to affect the commodity prices. If you have what it takes to predict the price trends, this is a place for you. Gambling houses shut you off if you keep winning the house all the time. But Exchange houses will find you investors, supporters and followers when that happens here!