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How to Invest Money Smartly

Einsteins definition of Insanity

Doing the same thing over


and over and expecting
different results.

Describe an Ideal Investment

Give me the highest possible return with


the least amount of RISK!!!

Understanding the Investment Funnel


1. Private deal
2. Bank-IPO
3. Stocks/Bonds
4. Mutual Funds
5. GICs/Savings
6. General Public
Most People are investing at the bottom of the chain

Understanding the Investment Funnel


Every Investment Opportunity starts as a
private deal.
This is where the most money is made.

After the business is developed, the


capitalists approach a bank to issue an
IPO (initial public offering).
The company is often split into a Bond
offering and a Public Stock offering.

Understanding the Investment Funnel


Next step is to sell the Stock on the Stock
Exchange (i.e.. TSX).
This is where the general public gets the access to
the shares of the business.

After the stock has been trading on the Stock


Exchange, various Mutual Funds start buying
the stock for the Mutual Funds investors.
This is where the majority of the general public buys a
piece of the company.

Understanding the Investment Funnel


The Banks go a step further with GICs and
Saving accounts.
Typical GIC gets locked for 3-5 yrs at the rate
of 2 - 4%.
These funds are used to earn significantly
higher returns lending money often at the
credit card interest rate levels.

Dismantling the Risk /Return Dilemma


Does high return always mean high risk?
Lets think of a high profile entrepreneur.
Many of the high profile entrepreneurs make
money out of thin air. How?
Because of their know how, people are willing
to invest into their ventures

What is the rate of return to the


entrepreneur?

Dismantling the Risk /Return Dilemma


High Risk doesnt have to mean High
Return and vice versa, High Return
doesnt have to be High Risk.
Its important to understand and calculate
the Risk
The problem is, it involves some work,
while for most people its easier to
embrace the herd mentality, and sit back.

Risk comes with Speculation


Speculation is where the majority of the
investment risk is, if we remove speculation we
reduce the risk significantly.
A question: where is the stock market going to
be in the next 2 months?
Would you like to bet?

Posing the above question puts us in a position


to bet which means that we speculate.
The nature of the stock market is speculation.

Risk comes with Speculation


Most people invest their money in the stock
market speculating rather than investing
Lets look at an example of the largest U.S. IPO:
VISA (March 2008)
The shares were sold for $44
When the shares hit the general market the price was
about $60, and in a short few days reached $88.
Has the profitability of the company doubled over a
few days? No! However, many investors speculated
or gambled on the price of the shares, not on the
profitability of the company.
Stock price eventually dropped down back to $40s)

The Emotions of Investing


Point of maximum
financial risk
Temporary
setback. Im a
long-term investor.

Greed

Hope

$
I knew it was a
great investment.

Wow, I feel great


about this investment.

Fear
Maybe the markets
just arent for me.

Point of maximum
financial opportunity

How about Mutual Funds


How many mutual funds are there offered
to Canadians?
There are more Mutual Funds on the
Canadian stock markets than the stocks
these funds are investing in. (currently
over 10,000 funds.)

How about Mutual Funds


Which funds are the best?
Depends on who you Ask:
The Forbes magazine will tell you one story
The Money magazine will tell you another story
Yet the Kiplingers will tell you a very different story!

The difference in selection comes from the


personal perspective of the editor
Sponsorship also plays an important role as well (i.e.
Power Corp)

Mutual Fund Fees


Mutual Funds have fees.
The annual fees are called MER (Management
Expense Ratio)
Back End charges are called DSC

All funds have fees, even the so called No Load


Funds or Low Load Funds.
Average fund fees are in the range of 2%-2.5%
Index Funds have the lowest fees (<1%)
Only about 20% of funds do better than the
stock market in general.
However, Mutual Funds are a convenient way to
invest.

Monkey Portfolio
Illustration:

What to Expect from the markets in the


near future?
Watch for the next downturn caused by
Alt-A and Option ARMS mortgages
Expected default rate of 70%
Estimated 8 million families will be
foreclosed in the next 4 years.
http://www.cbsnews.com/stories/2008/12/12/60minutes/main4666112.shtml

So, Should you put all your money into


the mattress?
Emphatically - NO!
If we are not to put our money into the
mattress, how do we invest than?
Good investing involves doing some
homework.
Lots of money could be made even if the
economy is sluggish.
There are Many Investment Opportunities.

Many Investment Opportunities


Learn from Warren Buffet:
He did not become rich by buying stocks, but by
investing his money into various businesses.
He only buys businesses that he understands
He didnt buy technology stocks back in the 90s
because he did not understand how they operate and
make money , that saved his skin.
Invest with the primary focus on the profitability of the
business, not on speculation.
Take the speculation out of your investments.

How to Invest
There are many high quality income based
investments.
Focus on profitability payouts (Dividend
payments)
Utility stocks: They are generally regarded as
ultra-safe, if a little on the dull side. Most pay
steady dividends.
Infrastructure stocks: Billions of tax dollars spent
on roads, bridges and power lines, some
infrastructure stocks may hold value in soft
markets.

Focus on Private Equity Investments


There are many excellent Private Equity
Investments.
Profitability is significantly higher than Stock
Markets.
If proper due diligence done, speculation is
completely removed from the equation.
It focuses on the profits from underlying
business.
Example: Alberta based oil wells, many pump out oil
at the cost of under $20, as long as the oil price is in
the $50+ range the profitability is there. Its important
to make sure it pays regularly. Oil wells based
investments pay annually 20-30%. Investment
minimums start at about $10,000.

Focus on Private Equity Investments


If you open Business section of, say,
Edmonton Journal you will see some
private investment firms advertising cash
flow returns in range of 10%.
Could be good opportunities, however
doing the due diligence is of the utmost
importance.
Make sure that you understand how the
money is earned, and also that youre
comfortable with it.

Examples:
Real Estate based Asset Investments
Land Investments
Commercial Real Estate developments
Strip Malls etc.

Life Settlements
Commercial Mortgages
Fractions of Oil Wells

Important:

Invest in a solid asset


Protect yourself from inflation
Do the due diligence
Consult someone who understands the
particular industry
Diversify:

Businesses or Stocks (be and owner)


Bonds or Mortgages (be a lender)
Real Estate or Land (be a holder)
Gold or Cash (be ready for an opportunity)

Becoming a Venture Capitalist


Becoming a Venture Capitalist is not hard,
however it requires from you to assume the
responsibility for you own financial affairs.
It is not convenient, but it puts you in the driver
seat.
It will empower you, and give you a great
reward.
It will bring you closer to your money
Good Luck and Fare Well.