WTF Are Investments? Part 2: What Is Investing?

August 2, 2016 Paco de Leon

What Is Investing?

This is an educational course about investing. This is not investment advice (Yeah, I’m gonna say this every time).

At its core, investing is so very simple. It’s using your money to try to make more money. If your money were rabbits, the idea of investing would be like your rabbits getting it on to make more rabbits. But the big difference between money and rabbits is, investing your money doesn’t always result in more money. You can lose money when you invest it. There is risk involved in investing. By investing, you can potentially get paid for taking the risk of losing your money.

Investments Are Just Like Frozen Treats

Let’s break the surface - in order to actually invest, you need to buy an investment - sometimes referred to as an investment vehicle.

Think about going to invest like walking into a shop that sells different types of frozen treats. The shop sells ice cream, gelato, frozen yogurt, chocolate covered bananas, slushies, popsicles, snow cones and push pops. All sorts of different shit.

All the frozen treats are different, but they are all frozen. They have a different process, a different texture, they might need to be kept at different temperatures and have different origins - investments are like this too. They’re all investments, but they’re different! There can be small subtleties (like ice cream and gelato) or they can be very different (like slushies and chocolate covered bananas).

In the investment world, there is something called investment vehicles. These are the things that allow you to invest your money. Think of these like the different types of frozen treats. A frozen treat is a vehicle to satisfy your desire for something that is cold and sweet. Am I torturing the analogy enough to make you understand?

Stocks are ice cream.

Bonds are gelato.

Businesses are popsicles.

Mutual funds are slushies.

Real estate is frozen yogurt.

So when you hear things like “investment options” or “ways to invest”, think about the frozen treat example. As long as it’s an investment, the goal is to try to make your money earn more money.

The way each frozen treat has its positives and negatives, same goes with investments. Some vehicles are riskier investments than others. We’ll dive deeper into this later on in the series.

The point is that it doesn't matter which method you choose for investing your money, the goal is always to put your money to work so it earns something. Even though this is a simple idea, it's an important concept for you to understand.

**You Have To Give A Few F*cks About Your Investments**

True investing takes the investor giving at least a few fucks about the investment. That doesn’t necessarily mean that you have to care about the companies that you invest in. It does mean that you’re supposed to do your research, perform some analysis, figure out what your goals are and if your investments are in line with your goals.

Let’s use the example of your physical fitness. The fitness experts always recommend that you have a/some fitness goal(s). Here are some examples of goals:

look good naked,
building up enough endurance to run a marathon,
bench pressing your body weight,
being able to complete a Ninja Warrior course better than anyone in the world,
have more energy,
feel stronger.

Different goals inform how you should train in order to achieve them. In other words, your goals dictate how you should go about training. Same with investing. Your goals dictate how you invest. And yeah, you can have more than one goal.

Why Should You Invest?

You can grow your money over time.

You can minimize the risk of your money losing its value due to inflation.

Inflation is like if a person were to slowly add water to our supply of whiskey. You might not notice the difference at first. But after a while, the whiskey would not be as strong and eventually it would not work at all. Your whiskey would no longer have the value it had before.

Because it’s smart and savvy.

Full disclosure: It’s totally possible that the entire world economy will one day change and you won’t need to save or invest any money. Or, if everything goes according to plan and you don’t save and invest, chances are you can’t retire. Anything is possible. But maybe the idea of retirement is old and outdated?