How to invest money and become rich

If we ask someone the way by which we can become rich. I will reply to you to become an investor. If you say that I am not an investor. That’s is not true. Because we all are investors. Some invest money while investing their time by doing the job or business. It is important to know that we all invest at least something to earn money. So, it is important to become a great investor in our life. For example- If you want to become rich then you have to invest money which you have earned by doing a job or business. If you ask me which is the book. Then I will surely answer you to read the book The Intelligent Investor.  This is not my personal opinion because the 3^rd richest man in the world (2019) i.e. Warren Buffet also suggest this book because the author of this book is the mentor of him.  In fact, he is not only personal but also other investors call this book even The Bible of Investors.

investment

Now I am going to tell core principles and fundamentals from this book through which you can also become successful as well as a great investor in your life.

So, let’s begin:

1. Aggressive Vs Defensive

Before starting this, I want to tell one story which will surely help you to clear this. Suppose there are two friends who want to become rich in their life. Both of them have many similarities but one thing is different in both of them. This is one is aggressive and other is a defensive investor.

aggressive investors

 The aggressive investors believe in the policy of “More risks, More Profits”. So, he invested his money on such stocks of the company where he found his policy whether the company is reputed or not.

But on the opposite hand, the defensive investors on the policy of “Low risks, Medium Profits”. So, he invested his money on such stocks or mutual funds where he may get returns whether it is medium or average, it does not matter.

defensive investor

Once, his friend who believes in aggressive investor came and told him that I made 60% profits on one stock. But the other friend thinks that his total investments are not more than his profits.

If we judge aggressive and defensive investors from the above scenario, you may find that aggressive investor is better than a defensive investor.

Now, let us understand their investments in details:

Defensive investors:

Suppose he made the four investments of 10,000 each. In which he gets returns in the following ways-

Investment 1: 5% gain

Investment 2: 2% loss

Investment 3: 12% gain

Investment 4: 20% gain

From this, he earned a profit of 8.75% as a whole.

Aggressive investors:

Suppose he made the eight investments of 5,000 each. In which he gets returns in the following ways-

Investment 1: 50% loss

Investment 2: 5% loss

Investment 3: 60% gain

          .

          .

From this, he earned a profit of 2% as a whole.

From the whole story, we can conclude that defensive investors are better than aggressive investors. As in the short run, the aggressive investors may earn more profit but in long run, it can make you suffer loss. As there is a principle in investment, “Fewer risks, Fewer rewards” and “High risks, High rewards”. But in the long run, it is better to invest in less risky investments where you can earn less or average rewards which will give benefits to you in long run.

2. Mr. Market

This is one of the interesting concepts of share market. Here, Mr. Market Concept. Here Mr. Market = Stock Market

mr. market

According to this concept, Mr. market offers you the opportunities to either buy or sell. It is connected to the emotions of the people not based on logical. It always changes their values. It can pay you either low or high in comparison to the value. If you want to become an intelligent investor, then, you need to do your business with Mr. Market when it offers you to buy when it is low than market value and sell when it is more than market value.

3. Defensive investors

These investors are also known as passive investors. These investors mostly trade in very less quantity. The author also suggests you become this type of investor. This is because maximum people do not have time to study the company and to decide when to buy or sell. I also suggest you become a defensive investor who plays long term safely.

Now, I am going to tell you 9 fundamentals that will help you to become defensive investors:

fundamental

* Divide your portfolio in 50-50%- It means if you have 1000 rupees to invest. Then, you can invest your 500 rupees and keep other 500 rupees in cash/bonds/other investments. It means that when you earn 10% of profits on one stock. Then, take 10% from it and maintain a 50-50% ratio. This is a need to be done in a specific interval. This is because of the concept of Dollar cost average.

* Diversification- It means to invest at least 10-30 companies in different industries.

     * Large companies- Invest in those companies which are established from a long period of time. 

     * Conservatively financed- Invest in those companies which have their current ratio more than 200%. It means which have assets doubled of their liabilities.

     * Dividend history- Invest in those companies which continuously give dividends from 10-20 years.

     * Earning history- Invest in those companies which do not face earning deficits from 10 years.

     * Growth- Invest in those companies which are growing with 3% from the last 10 years.

     * Cheap assets- Invest in those companies which have a stock price not more than 1.5 times the net asset value.

     * Cheap earning- Invest in those companies which have P.E. Ratio less than 15 within last one year.

mutual funds

If you find all these terms are complicated, then it also has an alternative. That are low risks mutual funds or index funds. If you can be happy with average returns and keep your fewer expectations which the great investors teach us then first three and last point is enough for you. But if you want high then the next point will help you.

4. Enterprising Investors

Actually, there are 3 types of investors:

• Defensive
• Aggressive
• Enterprising

enterprise-investors

The first two types of investors are already discussed above.  Enterprising investors lie between defensive and aggressive investors. These investors do not want as profits as defensive and as risks as aggressive investors. They are those types of investors who do research on the companies and able to beat the markets because they are very active in their investments. In order to become such type of investors, we need very much time as well as efforts.

Besides time and efforts, 4 important characteristics should have:

• Patience
• Discipline
• Eagerness to learn
• A lot of Time

This is very difficult for every person to have these 4 fundamental characteristics. But if you are eager to become enterprising investors then you can become by doing any 4 activities:

* Go against the market- It means to buy stocks when everyone is selling or the market is down, sell when everyone wants to buy or the market is high. This is a need to down when we have 25-75% ratio as compared to 50-50% ratio which defensive investors do.

* By buying Growth Stocks- In order to buy growth stocks, the investors need to buy the stocks of big company which is not popular in the market.

* By buying bargain stocks- These are those types of stocks which are sold less than intrinsic value. It means to find the well-established company but has fewer stock values.

* Buying special cases- It includes those stocks of small companies which the big company is going to acquire it.

5. Margin of Safety

safety

Suppose the shipping company wants to develop a ship which can handle 50 people’s weight. Then the shipping company will make the ship by considering the extra weight like 60,80 or even 100 people’s weight. This consideration of extra weight is the margin of safety. The same thing we need to consider while investing money. As we already know that the value of the stock is not the same as real value. While considering the margin of safety, we need not pay the amount not more than its 2/3 value.

This consideration of extra weight is the margin of safety. The same thing we need to consider while investing money. As we already know that the value of the stock is not the same as real value. While considering the margin of safety, we need not pay the amount not more than its 2/3 value.

For example- If we have a value of the stock is 50$, then you need to buy it in 40$. In this way, we will earn the profit in buying and also you need not to depend on the future.

These are the 5 basic fundamental principles that help you to invest your money safely and also help you to create a source of passive income for you. Now, I am sure that you will be going to invest your money in the future.

At last

Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.                                       ― Benjamin Graham