The Difference Between A Good Investor And A Bad Investor

Many people invest in mutual funds. When I ask someone, who is investing in mutual funds, he answers: “But I am also investing. I have a portfolio of mutual funds. I also have bonds and stocks. Isn’t this all investment?”.

Yes, saving is also an investment. Buying mutual funds, stocks or bonds is also an investment. But it is the kind of investment a saver would make, not an investor.

Let’s take a look at the passive investor philosophy. Most investment advisors provide a recommendation like that:

• Work hard

• Save money

• Get rid of your debt

• Make long-term investments

• Diversify your investments

This is good advice for a certain group of people – suitable for people with a savings philosophy or passive investors. In today’s circumstances, I believe this advice is riskier than any financial advice. It may seem as a reliable and wise advice to those who are financially inexperienced.

There is only one word to distinguish between a saver and an investor. That word is leverage. Thanks to leverage, you have the ability to do more with less.

Many savers do not use financial leverage. And if you don’t have enough financial knowledge or experience to apply leverage, it would be better for you not to use it. I will explain this to you later. Let’s take a look at these standard recommendations from the perspective of the saver and then the investor.

Work Hard

When many people think of “work hard” advice, they only think about their own hard work. The leverage effect on one’s own hard work is very small. Imagine if others will help you to get rich with their hard work. This is the power of leverage. States do not ask us to seek jobs, but to create jobs. If everybody starts looking for work, economies will collapse. For economies to grow, we need people who can create jobs.

Save Money

The problem with saving money is that the current economic system needs borrowers, not savers, to grow. In order for our economic system to continue to grow, it needs smart borrowers. The system does not need people who get poor by borrowing, but people who can borrow money and get rich. While 10 percent of the people who borrow money in the world benefit from their debts to be rich, 90 percent of them become poor with their debts. And this ratio is getting worse every day.

Get Rid of Your Debt

Many savers think that debt is bad and it’s smart to pay off mortgage loans quickly. And for many people, borrowing is bad and getting rid of debt is wise. However, if you are willing to devote some time to your financial education, you can use your debt to move forward. But if you are considering investing with debt, I would like to warn you once again that you should invest in your financial education first.

There is good debt and bad debt. Being financially smart is knowing when to borrow and when to avoid it.

In these economic conditions, savers are losers and borrowers are winners. For whatever reason, you should always be careful when using borrowed money.

Make Long-Term Investments

Look at this advice in terms of sellers: “Give me your money to keep me for years, and I’ll get certain payments from you over the long term.” The phrase “make long-term investments” is like the advantages that allow you to earn points. You become a loyal customer.

Depending on the payments you make to manage the fund, mutual funds may not earn you as much money as other investments.

Diversify Diversify Diversify

Warren Buffet, considered the richest investor in the world, says this about diversification: “Diversification is a safeguard against ignorance. It won’t make much sense if you know what you’re doing. “

Then the question arises: Whose ignorance do you protect yourself from? Is it your own ignorance or the ignorance of your financial advisor?

Diversification generally means that you should not put all the eggs in the same basket. Warren Buffet puts them all in the same basket. He once said: “Put all your eggs in one basket, but watch your basket carefully.”

Personally, I prefer to focus rather than diversify, and actually the reason I was able to move forward was focus, not diversification.

I saw an acrostic on focus in a book I read.

For many, diversification is a good strategy. This is only because it protects investors from themselves and inadequate advisors.

The traditional financial planning advice “work hard, save money, get rid of your debts, make long-term investments and diversify” is good for the average. This advice is also good for those who are rich but are not interested in learning how to become an investor. Many movie stars, wealthy professionals, or former athletes do that. Just remember that while following this path, you will have a very small leverage.

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Introduction to Economics # 1

Opportunity Cost

Whenever you use a production factor it will have a cost. Why is that? The factors of production are limited, not unlimited. As a result, when you decide to use land, labor, capital, or entrepreneurship for one purpose, you lose the ability to use it for another purpose. Take, for example, labor – your own labor – as your own resource. Let’s say you can spend an hour writing a book, teaching a lesson, or knitting a cardigan. Suppose you prefer to knit a cardigan. You can neither write a book nor teach during this hour. If your second-best option is to write a book, economists say that the opportunity cost of an hour spent knitting a cardigan is an hour you can spend writing a book. Here, the opportunity cost of knitting a cardigan for an hour is reading a book for an hour.

Implicit and Explicit Cost

Opportunity cost is sometimes called implicit cost. In addition to the easily calculated explicit costs of a production activity such as labor, raw materials and overheads, there are also implicit costs that are more difficult to calculate.

Considering the Opportunity Cost

For example, on a beautiful Friday morning, you think, “I can go to work as I should, stay home and sleep all day, or fly to Hawaii, hang out at the beach and dive.” Imagine you decide to go to Hawaii and your second-best option is to go to work. What was the cost of your trip?

You paid for a taxi to the airport, airfare, hotel all-inclusive accommodation, and diving. These are the first to come to mind. So, was that your only expense? No. You’ve also given up any money you can earn by working. Opportunity costs give bad results. You should always be sure to take that into account when planning.

Assumptions in The Economy

Economists make some assumptions when talking about their favorite subject. They expect you to know (and accept) these assumptions. Important three of them are as follows:

1.Nothing else changes. When economists argue that “If income taxes decrease, consumption increases.” it should be understood as “If income taxes go down and nothing else changes, consumption will increase.”. You see the difference between the two expressions, right? The phrase “and nothing else changes” is also known as the ceteris paribus conjecture. Ceteris paribus, translated means “while all other elements are unchanged”. So, when reading about economics, keep in mind that all statements about cause and effect relationships are written with the assumption of ceteris paribus.

2. People are rational and act rationally. Another assumption that economists make and love is that people behave rationally. Economists assume that people make their choices considering all available information, as well as the benefits and costs of that choice. Also, economists assume that the choices make sense. The assumption that people behave rationally becomes the subject of debate between different schools of economic thought, but it is a useful assumption for most economic decisions.

3. People are selfish… The last assumption of economists is that people are self-interested. When it comes to deciding, people think of themselves first of all. Pure altruism is not possible in the economy. Economists cynically assume that human behavior is driven by self-interest. For example, suppose a grenade was thrown into a moat full of soldiers. Let a soldier jump on the bomb, sacrificing his own life to save the others. According to the economists, this soldier immediately calculated the marginal benefit and marginal cost of his decision, decided that the marginal benefit of rescuing his comrades would be more than the marginal cost of his life, and jumped on the bomb in a utilitarian act that maximized his personal interest. He saved his friends to maximize his usefulness as a soldier.

The assumptions made by economists are open to criticism and debate. Many critics think the field of economics tends to be too abstract and theoretical to have real-world values. The failure of most economists to predict the latest economic crash supports the notion that economics ignores human psychology.

Economics as a discipline has reached a turning point, and the assumptions that economists cherish require careful examination. Instead of being tidy, abstract and mathematical like physics, economics should be messy, complex and organic like biology.

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