“I’m sorry madam. Everybody sells diamonds. There are diamonds everywhere” - Casablanca
Lately, I've been getting a lot of questions surrounding investments and best practices. The most important thing to understand when it comes to investments is the marketplace you are operating in.
That's the first step towards investing well.
Markets are amazing places - vegetable markets, stock markets, flea markets, fish markets - they are people and their circumstances coming together in commerce.
People have goods to sell. People are potential buyers.
The push and pull of the wants and needs of these buyers and sellers clank together and result in market prices for the goods, services, and securities. Free markets like people are not perfect but they do reveal shifts in culture and opportunities.
Whether you hold jewelry, art, a boat, or a stock, when you want to sell one of your Assets to redeem cash, you will use a form of a marketplace. When you considering how to hold your savings as Assets, know these things about the value of your Asset in the marketplace:
Current market value and price
The big picture, Macro risk
Speed, Liquidity risk
Interest rate; and
Market value will often have little to do with the original price you paid and much to do with what someone else is currently willing to pay for it. Regardless of the condition of the goods you are looking to sell, your price will be affected by the confidence and outlook of the marketplace you are looking to sell in.
When people are nervous about jobs, for instance, they will place a lower value on luxury goods that require maintenance to keep them from deteriorating (ie. boats) and place a higher value on assets like gold.
How fast can you turn your Asset into cash is its liquidity?
For my stock investments, my funds are available almost instantaneously. Conversely, my home investments have taken as short as 4 weeks and as long as 9 months to convert back to cash. The illiquidity in my property’s marketplace reduces the access to my money. All sorts of things can happen while I am waiting – this is called liquidity risk.
Higher interest rates could increase the cost of debt a potential buyer would need.
This increased cost for their debt could decrease the amount they are willing to pay for your asset.
Know why you are buying something. Why you are selling something. Use emotional days to your advantage.
“You have to learn the rules of the game and then play better than anyone else” - Albert Einstein
To be a good investor, start by laying out your goals and savings.
Having an idea of what you are saving and when you will need the money will help you narrow marketplaces and the scope of investments right for your life's story.