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Saturday, January 8, 2011

It’s wise to invest, but invest in what you understand


IN the parable of 10 gold coins, a man of noble birth gave each of his servants a gold coin before going away to a distant land. “Put this money to work (invest it) until I come back,” he told them. On his return, he called each of his servants and asked what they did with the money.

The first said he had earned 10 times the capital given to him, the next five times. The third came and said he buried it in the ground. The master was very angry and asked him why he did not put the money on deposit to enable him to at least collect some interest. The third servant justified himself by saying that out of fear for his master, he did nothing.

Putting our savings in the bank may not be a popular option today but that aside, if the story of stewardship and investment was relevant in a simple agrarian society during biblical times, it is all the more relevant today.
The over-riding principle of that parable is that investing is not wrong. In fact, it is wise to invest.

The parable remains relevant because today, unlike before, all sorts of financial instruments are available. Although options may be limited when compared to the West, technology has allowed many to ignore national borders and many have invested globally. There is a need for wisdom and simplicity. Invest in what you understand.

Secondly, it remains relevant because the principle of investment takes into account the time element. The nobleman went away to a distant land. In those days, it takes time to travel from one place to another. He gave time to the servants to invest. It was long-term gains he was looking for. Consider the time element of your investment choices. Invest for posterity because it is a legacy that you want to leave behind.

Granted, the spectre of inflationary pressures then and today are vastly different. The world did not have seven billion hungry people. They grew their own food, unlike today where food prices are experiencing a spike. It is this volume in numbers feeding on each other in this pursuit for gains that gives the strength to this tidal wave that is just beginning to form in Asia. Be wary of mass exuberance.

Whether it is time deposit, properties, stocks or gold, we are all servants of the market. Conversely, we are also the force and strength behind the market.

We invest for three reasons to speculate, to hedge against inflation, or to arbitrage. Speculators do so to make a quick profit. They buy a house only to “flip” it when it is completed. They do not need the house or want the house for what it is. They use is as a channel to make quick gains.

Retirees and the more conservative investors hedge to preserve the value of their nestegg. That is a strong motivating factor amid today's inflationary pressures. An investor buys a house to hedge against inflation, hoping that the value of the house will remain. He also derives an income from it for future gains.

The arbitrageurs take advantage of the discrepancies in the markets. They buy a house in London because of the weak sterling and low interest rates in the hope that currency will appreciate in future, together with better house prices. In the meantime, they use it as a holiday home.

Everyday, while someone is making money, another is losing the shirt off his back. As the FBM KLCI takes on new peaks in the coming months with expectation to surpass the 1,700 mark, and property prices continue to trend upwards, it is time to return to the parable and the simplicity it represents.

The story concluded with the master taking away the third servant's gold coin only to give it to the first, the one who made 10 times the profit. The other servants protested, saying that he already has a lot, to which the master said: “To those who have, more will be given.”

Warren Buffet, one of the world's greatest investor, began with little. He had an interest in saving and making money. One of his strategies is patience. Like Buffett, Microsoft Bill Gates is counted among the world's richest because he did what he like. Both of them enjoyed their work. Likewise Jim Rogers, the other great investor of our times.

Not many of us will be able to enrich ourselves from the work we do. But we are given opportunities to invest. What is the motivating factor?

Assistant news editor Thean Lee Cheng does not think fear should be part of the equation. Remember the third servant who did nothing out of fear? But she does realise that wisdom is very much a scare commodity in today's times.

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