3 November 2017

 

NOTE TO READERS: If you jumped to this page ‘out of the blue’ then please know that it is part of a bigger article about investing in stock to promote sustainability, elsewhere on this website.

 

The basic investment options

If you know about investing, you can skip this section. If you don’t know about investing, then this section prepares the ground for the next.

All practical learning can start with the brilliant series ‘for Dummies’. In any case, that is where I started: Investing for Dummies by Eric Tyson (Published by John Wiley & Sons, Hoboken NJ) I found the 6th edition at abebooks.com. It’s from 2011 so after the 2008 crisis, but as you will see, that does not matter. I also read Så här kan alla svenskar bli miljonärer by Per Börjesson (published by Månpocket in 2016). Freely translated the title means ‘This is how all Swedish people can become a millionaire’ (In Swedish kronor that is about ten times easier than in Euros or US dollars). Both pockets are written by authors that derive their income from advising on investments, but as far as I could see neither is related to a bank or investment firm. So, I trust them.

DISCLAIMER: Please note that the following is just my summary and that it is not investment advise.

According to these books, there are roughly speaking three ways to get rich with your own money. If filthy rich is your goal, then start a company. That’s what most of the filthy rich on this planet did. Downsides: hard work and chance of not achieving your goal are astronomical.  Second is real estate development. This also involves hard work. Chances of success are better and the reward can be quite high but growth does not continue for ever. In fact, home-owners are such investors. Thirdly investing in stock and bonds. Here the books diverge a bit. Tyson warns for all other so-called ‘financial instruments’ whereas Börjesson is a bit more subtle. They seem to agree however that the simpler the instrument the better because then you have a chance of understanding how they work in real life.

Since I do not want to invest a lot of my time in my financial investments, I focused on stock and bonds. With the first you buy a share of a company, which may pay dividend. Bonds are loans to the issuing company or state. You are relatively sure to get your money back after a predetermined period and with a predetermined interest. Between the two, stock is more risky (i.e. you can lose your money) but in the long-term more rewarding, bonds are less risky but also less rewarding.

Now, here is the trick: to make money through investments in stock and bonds, you need to diversify your investments and be patient. To diversify means to not invest all your money in one company (everything on Apple may sound good but so thought investors in Enron) but spread over multiple companies. This reduces your risk. Being patient means, being able to wait 10 to 15 years or more. The idea is that on average and over the long-term, the value of stock increases. After all the crashes and recesses of the past hundred or so years, the ‘markets recovered’ as they say in newspapers, i.e. the value of stock rises again and after some years even above the value of just before the crisis.

Diversifying sounds nice and it is easy if you do not care about what your money supports as long as you get your profit. If that is what you want and you have enough money you pick a bunch of companies randomly. However, if you do not want to invest a lot of time – because you are not just greedy but also lazy – then you this is not a handy way to go because once a year or so you need to check how your stock is doing. If a company’s stock depreciates for a prolonged period (unfortunately, neither of the two books explains how long that is) you may, after all, want to sell. Also, since you are a share-holder you get invited to meetings and have to keep some administration.

You can diversify in an easy way by investing in ‘funds’. These funds are run by banks and investment firms. They invest your money for you in a set of companies around some theme (sustainability, oil, IT, whatever) or through some formula (high-tech startups). They take care of the selection and the administration, and obviously you pay for these services one way or another.

These funds can be ‘actively managed’ through manual labor or they can simply follow an ‘index’. Such an index basically is a list of companies. For example a list of the 50 biggest companies in the world or a country, or a list of socially responsible firms. Someone or some company needs to make such a list, but as you can imagine some lists can be generated by a computer. So if you want to make a lot of money, you follow a list of most profitable or biggest firms.

These funds drew my attention because they seem easy to work with, it is relatively easy to understand how they work, and there may be funds oriented towards sustainability or human rights.

Continue reading …

If you are following the main article about investing in stock to promote sustainability, then continue reading the section ‘Sustainable investment funds and their flaws‘.

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