Investing Explained Simply

Investing – All You Need To Know

In this post, we’ll deep dive into the concept of investing, defining exactly what it is, determining the difference between investing and gambling, lump sum versus cost averaging, time in the market versus timing the market, bull and bear markets and more.

What Is Investing?

Investing is the act of committing recourses to an endeavour in the present with the expectation of receiving some form of benefit in return in the future.

Effective investing is the result of understanding and applying a number of universal principles, that, when applied successfully, maximise returns.

Investing Versus Gambling

Investing is a positive-sum game where all participants can gain value. The economic pie can expand.

Gambling is a zero-sum game where one person’s gain is another person’s loss. The economic pie can’t expand.

Lump Sum Investing Versus Cost Averaging Investing

Lump Sum Investing is the strategy of investing maximum amounts of an asset, whenever possible, regardless of the price.

Dollar Cost Averaging is the strategy of investing fixed amounts of an asset, at periodic intervals, regardless of the price.

Research shows that Lump Sum Investing is a more effective strategy for assets that are volatile to the upside while Dollar Cost Averaging is a more effective strategy for volatile but flat assets over time.

Additionally, Lump Sum Investing is a more effective strategy for maximising profits. Dollar Cost Averaging is a more effective strategy for minimising losses.

Time In The Market Versus Timing The Market

Time In The Market is the strategy of buying and holding assets until the original reasons for buying change or a pre-determined goal is achieved. It tends to be a long-term approach where fundamentals matter more than timing.

Timing The Market is the strategy of buying and selling assets based on predictions of when the market is at its lowest dip and highest peak. It tends to be a short-term approach where timing matters more than fundamentals

Studies suggest that Time In The Market is a more effective and sustainable strategy for the vast majority of non-professional retail investors when compared to Timing The Market. The longer you are invested, the more you increase your chances of a positive outcome.

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” ― Pere Lynch

Bull & Bear Markets

Everything comes in cycles. The same way night follows day and day follows night is the same way bear markets follow bull markets and bull markets follow bear markets.

Not only are economic downturns a normal part of the market cycle, but they are a necessary and healthy part of the market cycle. Economic downturns are a feature not a bug.

The same way forest fires are necessary to clear out the dead wood and provide fertile ground for the strongest and most resilient trees to thrive, is the same way economic downturns are necessary to clear out the dead wood and provide fertile ground for the strongest and most resilient entities to thrive. In other words, economic downturns are a mechanism that markets use to autocorrect.

Bull markets can make you rich. Bear markets can make you wealthy.”

Law Of Diffusion Of Innovation

The Law Of Diffusion Of Innovation is a theory developed in 1962 by Everett Rogers. It outlines how innovations are adopted by societies. According to this theory, there are 5 stages of adoption. They are:

  1. Innovators (2.5%): Explore new ideas and technologies.
  2. Early Adopters (13.5%): “Opinion Leaders” who like change and may share positive testimonials.
  3. Early Majority (34%): Read reviews by Early Adopters about new innovations before purchasing.
  4. Late Majority (34%): “Sceptics” who don’t like change and only adopt so not to be left behind.
  5. Laggards (16%): “Traditionalists” who adopt new innovations when there are no alternatives.

Any company planning on bringing a new innovative solution to market must accept the fact that not every customer will be willing to buy it immediately.

Summary

Investing is the process of allocating recourses to an endeavour with the goal of receiving some form of benefit in return.

The same way floods replenish soil and fires rejuvenate forests, an economic market crash clears out all the exhausted elements and creates an opportunity for fresh growth.

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