Let's Look at the Investment Alphabet

Hi ladies and gents,

I hope everybody is having a lovely time during these cold days while moving towards the end of the year and that your were able to cross off your list at least a couple of 2023 new years resolutions.

Speaking of crossing things off a list. 

• Crossing all the T’s today - Investment types

• Closing the Gap - Diane von Fürstenberg

• Book of the month - Intelligent Investor by Benjamin Graham - part deux

LET’S COVER THE BASICS

Bonds, ETFs…what are they?

So, we spoke about stocks last week. We also spoke about art investing in our 2nd post. So we’ll skip those and jump into other assets that can be a good investment. I’ll highlight also some pros and cons of them, but will not go in depth. This is meant for your basic understanding only.

Let’s start with bonds¹. Not Bond, bonds. Plural.

I’m sure you are all familiar with loans. Think of bonds as a way of loaning your money to your brother with the agreement that he’ll give you back the money with some added sugar (interests) on top. However, instead of loaning that money to your brother and hoping for the best, you loan your money to a government or a company. I’m sure everyone has heard on the news that “the government will be issuing new bonds to support the government” a.k.a. build roads, schools, fight certain causes such as the pandemic etc.

When you buy bonds, the government uses the loan to finance its operations and after a certain timeframe, that can go from a couple of days to a couple of years, they return you the money with interests. The governments are not the only ones that issue bonds. Companies can also do it. This is their way to diversify their financing options.

Bonds are a so called fixed-income investment. What that means is that they provide investors with a stream of fixed periodic interest payments and the eventual return of principal at maturity. Put simply, it means that you know in advance for how long will they keep your money and how much you are getting back at the end, if you don’t sell them before. Which you can also do. If nothing major goes wrong of course.

Next up - mutual funds². They are usually set up by banks or other financial institutions that pool together money from a group of investors to buy stocks, bonds or other similar investments. When you invest in such fund, you essentially buy a share in this fund and indirectly buy stocks/bonds of other companies. The value of your investment depends on the performance of this fund - performance of the stocks/bonds bought by such fund.

There are passive and active mutual funds. Active funds have employees who analyse the markets and pick a combination of stocks/bonds/other investments that they think will perform well. Their goal is to outperform the market and try to achieve better results.

Passive ones explain themselves. They are passive (like your ex) which means there isn’t a team of portfolio managers that decide on the investments, but the fund aims to deliver the return in line with the market. 

Following mutual funds are ETF³ or exchange-traded funds. I know, it sounds complicated. It is not actually.

They are a type of a passive mutual fund that follow an index. What that means is that an ETF is holding a basket of stocks.

But hey, that sounds oddly similar to the passive mutual fund, don’t they?

Great observation!

They are similar, but there is a difference between them. Exchange (wink, wink) Traded Funds can be bought and sold on the stock exchange (just like individual stocks)— and mutual funds cannot. As we said before, mutual funds are set up by banks or other institutions and held under their umbrella so they can not be traded.

If you are a SATC fan (Sex and the city) as I am, you will know that this is the moment when Carrie and Mr Big found their dream home, which was a gorgeous NYC penthouse with a huge closet for all of Carrie’s shoes. Even though they broke up before moving in, it was probably still a good investment.

When it comes to investing in real estate⁴ you have a couple of options. You can either:

• invest in an apartment/house that you’ll live in

• invest in a place to rent out and make an income out of it - apartment/office space/other spaces that you can rent out to businesses

• invest in an REITs⁵, if they are available to you if you are not in the position to buy something

And the last investment option that we’ll cover today - commodities⁶. Think gold, silver, oil, diamonds and other goods that can be bought and hold value. Lithium is having a moment right now due to all the Tesla cars and other EV. Lithium is needed for batteries.

I am sure you have a “gold store” somewhere near you where you can directly buy physical goods (gold coins, bars) or so-called certificates that show your ownership. Second option to invest in commodities is indirectly by investing in shares of commodity companies or mutual funds focusing on that particular commodity.

You can even start by buying just a nice piece of jewelry such as a nice big diamond ring 💍 #manifesting

And that is it for today. We’ll be back next week with part 3 of this series, where we’ll talk about risk and we’ll strategize a bit.

Now go and whip your hair around the office, because you are one step closer to being the investment queen 👑 

GLOSSARY

• ¹ Bonds - a fixed-income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental).

• ² Mutual funds - an investment option where money from many people is pooled together to buy a variety of stocks, bonds, or other securities.

• ³ ETF - a basket of securities that trades on an exchange just like a stock does.

• ⁴ Real estate - is considered real property that includes land and anything permanently attached to it or built on it, whether natural or man-made. There are five main categories of real estate which include residential, commercial, industrial, raw land, and special use.

• ⁵REITs - a real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. Most REITs are publicly traded like stocks, which makes them highly liquid.

• ⁶ Commodities - a basic good used in commerce that is interchangeable with other goods of the same type.

CLOSING THE GAP

Diane von Fürstenberg

Mesdames et messieurs,

I present to you the woman, the icon, the legend - DVF 👑 

I think it was around 10 years ago that I bought her book, where she tells her life story and it’s fascinating. She was the miracle baby, born after her mother survived the concentration camps, who married a prince, then became rich and famous as a fashion designer.

In 2014 she was listed as the 68th most powerful woman in the world by Forbes.

Her famous wrap dress will celebrate 50 years next year. It is included in the collection of the Costume Institute of the Metropolitan Museum of Art.

Now, almost 50 years after it’s inception and even after shutting down almost all of her shops to save the business, her business still makes around $130 million a year. Now at the age of 76, she is handing her reigns into younger hands of her oldest grand daughters - Talita von Fürstenberg.

BOOK OF THE MONTH

The Intelligent Investor

by Benjamin Graham

In his book Graham talks about different relationships that money has with economic events, one of them being inflation.

One general truth is that if you have fixed income, inflation can cut into your budget. Holders of stocks or other assets that provide some passive income (dividends for example), may be able to mitigate the rising inflation.

Let’s talk about so called “money illusion” that often overshadows our view of money matters. If you receive a 2% salary raise and that same year inflation is 4%, you will for sure feel better, than if you take a 2% pay cut in a year where there is no inflation. Now if you do the math, you’ll see that you end up in the same place of -2%. We are wired in a way, that the change in our salary is more vivid, specific and close to us than the change of prices in the economy as a whole. That is why it is important to also consider the inflation when you measure your investing success.

One of the Graham’s arguments is, that the intelligent investor must never predict that things in the future, will go the same way as they did in the past. However, there are 3 factors that are always true, when it comes to stock market. It’s performance depends on:

• real growth - the rise of companies earnings and dividends

• inflationary growth - the general rise of prices throughout the economy

• speculative growth or decline - increase or decrease in the investing public’s appetite for stocks

General rule will always stay the same:

Many people stop investing because the stock market goes down or even worse - their first instinct is to bail their investment to “safety” when they are already in red. Instead of buying and holding their stocks, many people end up buying high, selling low and holding nothing but their own head in their hands instead of some extra money to fight the inflation.

And this is where the emotional discipline comes into affect, which we spoke about in previous edition. 

Part 3 coming next week 🙂 

SOME NEWS

• Strategic thinking is not only meant for business. Use it for your life as well.

• We spoke about Taylor in one of our previous editions, but since then besides everything else, she becamePerson of the Year by Time. They wrote a great piece about her.