Before one decides to invest in the share market, try answering the following question:
‘If you won a contest and could go out on a date with either Mother Theresa or Angelina Jolie, which one would you choose?’
[For ladies, try choosing between Gandhi and Brad Pitt]
If you ponder long and hard enough, it may be illuminating to realize that parallels can be drawn between the vastly different emotions Mother Theresa & Angelina Jolie evokes, and the world of investing.
Have you answered the question yet? If so, please read on…
Fixed Deposits are equivalent to Mother Theresa
1. Principal Guaranteed
The principal that you invest is virtually secure. There are veryminimal risks involved when you put your money in Fixed Deposits. If you invest in RM10K in an FD, rest assured that one year later, you SHALL see that RM10K still in the bank.
2. Returns Guaranteed & LOW
When placing a FD for a period of time, the interest income receivable is stated up front. True, the returns are paltry. Yet, the great thing is that they are GUARANTEED. There are no IFs, ANDs or BUTs… It’s a sure thing, PERIOD!
3. High Liquidity
If you ever need cash urgently, there are no problems whatsoever in withdrawing out your principal even though it’s being placed in FD. In a worst case scenario, you may have to forfeit a certain portion of your earned interest income.
Angelina Jolie and the Sexy World of Shares
Everybody wants to get on the bandwagon these days and invest in shares! Who doesn’t drool over a hot looking sexy babe? Same thing with shares, just dump your money and watch it fluctuate…One day it’s up, the next it’s down. Just be careful and don’t get yourself burnt! Investments in shares are risky and I’ll explain why:
1. Principal Guaranteed to Fluctuate
When you invest in the shares of a company, you must understand that the only thing that is certain is your investment SHALL fluctuate! Once you dump in RM10K, a month later, it may grow to RM15K or shrink to RM5K. If you are the type of person who cannot live with any risk, then don’t invest in shares.
2. Returns Guaranteed to Fluctuate
Returns in the form of dividend payout by companies are also uncertain. Usually the discretion whether to pay dividends (and the quantum) or otherwise, lies solely with the company. As minority shareholders, one does not have much leverage to request for dividends. So, unlike FDs, don’t be surprised if you don’t get a single sen out of your investment until you sell it.
3. Highly Liquid IF YOU ARE DETACHED
Yes, shares are highly liquid. Unfortunately for you, if the RM10K you invested shrunken to RM5K, are you willing to sell it off? That’s a 50% loss on your capital! Conversely, if the stock market is booming and your RM10K has ballooned to RM20K, are you willing to cash out and let go of your shares? Or are you going to hold on and hope it goes up further…???
With this in mind, let’s look at the Financial Dashboard below. As discussed above, we can compare FDs to Shares although there are vast differences:
The FD Interest Income is a certain and guaranteed. However, earnings for companies are susceptible to competition, economy and a host of other factors. Interest rates are certain and are computed in advance during FD placement, whereas the current earnings of a company is largely uncertain at the time of investment.
FD Principal = Share Price
The Principal that you invest in FD does not fluctuate. However, share prices fluctuate daily depending on the mood of Mr. Market and the global economy.
FD Interest Rate = Earning/Market Price %
Whilst the FD Interest Rate is a sure thing, historical Earnings/Market Price % is not always, a reliable indicator of future returns. Firstly, we are never sure of the earnings at the time of investing. as we are relying on historical information. Secondly, the market price fluctuates daily making it difficult to quantify the probable return we can make on our investment. Depending on the competition and economic situation, a profitable company in the past may turn out to be unprofitable in the future. This is a risk for all businesses and as investors, we have to bear with it.
With this in mind, let us look at Nestle’s Earnings/Market Price %. It is hovering around 4.5 % to 4.8% for the past three years. As Nestle is in a stable industry with a strong brand name, this appears reasonable. Yet, FD rates are approximately 3.7% per annum, Nestle only offers an additional return of 1%. Is it really worthwhile investing? Although there is an upside in terms of capital appreciation (i.e. share price goes UP!), perhaps one should consider whether there are other companies yielding a higher rate of return.
It is important to note that investment in shares is like dating a hot babe! Yes, it’s alluring at first sight, but exercise wisdom and caution, and hopefully you’ll avoid getting burnt. So, look before you leap!