type of investor

type of investor

What Type of Investor Are You?

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Investment basically means, ‘Make money with money to become wealthy.’ As an investor, you are interested in Return on Investment (ROI).

You can either be an employee, self-employed or a business owner to be an investor. They all may be investors but they operate at different levels of cash flow and knowledge. For example: an employee invests money that grows with time. This is because the principle of compounding works with time. On the other hand, a business owner –when he buys a new business – is basically leveraging other people’s time to grow rich. We will look at this in more detail later.

Types of Investors

There are basically two types of investors:

Passive Investor

type of investor

A passive investor is the one who is either an extremely busy person or a person who lacks the knowledge to make investments. These people either trust their money to fund managers or buy mutual funds to diversify the investment risk. This generally results in very slow growth of investment portfolio. In the majority of the cases, these investors only make money if the market is moving up. Their investment loses value if the market value of the investment goes down.

Active Investors

These are investors who take the effort of learning about investing. Most active investors take time to analyze and find deals that are below market value and therefore give higher returns. They actively follow the market trends and carry out both technical and fundamental analysis of their investment before buying. They make money irrespective of market dynamics, whereas passive investors are satisfied with a 10% growth in their investment each year an active investor looks for 20–50% or more. They understand risk and take steps to contain than risk.

Types of Investments

There are basically three types of investments:

Real Estate

This is simple, robust and most forgiving to mistakes. Property prices move very slowly and therefore do not require constant monitoring. Real estate investment also provides financial leverage that investing in stocks and businesses do not provide. It, however, requires a deposit and cash flow income for banks to approve your loan.

Stock Market

Investing in stocks requires knowledge to get started or you may land up losing your principal amount. You also have to monitor your investment regularly as stock prices fluctuate constantly.

You have to buy stocks at market value. They can never be purchased at a discount. There is very little financial leverage as banks hesitate to give loans against shares.

stock market

To make serious money out of stock market you have to become sophisticated and accredited investor. For this, you need assets worth $ 1 million and an annual income of over $200,000 in USA. This amount can differ in other countries. Once you are an accredited investor, you will be able to invest in securities that give higher returns but also carry higher risk.

If you have limited knowledge or no time then stick to buying mutual funds. Buy index funds that track markets such S&P 500 funds, BSE, ASX etc. These funds operate without interference from fund managers and carry no management load and therefore give higher returns. It may seem strange but statistics show that very few fund managers beat market on regular basis.

Businesses

This gives the highest returns if you can buy low performing businesses for cents to a dollar and turn them around for profit. However, you need to have experience as a business builder to turn around companies in your area of expertise. For inexperienced operators and first time buyers, it is advisable to either buy a reputable franchise business that have all the systems in place or a well-run business.

After you have gained experience in operating a business for couple of years and gained some confidence, you can look to buy businesses below their value and increase profitability by increasing the turn over and reducing costs through better management.

business owner

How to Grow from Business Owner to Investor?

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Business Owner – Time to Relax?

A business owner has huge rewards but problems as well.

Cash flow Problems

business ownerA business owner, in all probability, will be making more money but it will not be enough. One of the byproducts of growth is the shortage of cash flow. To grow, you will need more and more cash. Cash management becomes crucial to your success. You will also need organizational changes, build systems and leadership within your organization.

Employee Problems

As your business grows, you will hire more employees. There is a saying, “employees cause more headaches than machines.” You will be let down time and again if you do not hire properly qualified manpower and train them for their tasks, unfortunately, instead of relaxing, your problems will grow exponentially and you will find yourself working harder and longer hours.

How to Replace Yourself?

At times, the situation becomes so stressful that an owner wants to hire a manager as you have money to do so and run away from all the problematic issues. If this is done pre-maturely, it can cause a company to collapse. You will need to place systems, checks and balances in place before you can think of handing over your business to someone else and retire.

On the other hand, there are owners who find it extremely difficult to hand over managerial control of a company they have worked so hard to build—it is their baby, after all! They think that no one can do a better job than them.

To succeed at this level, you must first find someone who is perhaps as smart as or better than you to run your business. Once you have found such a person, you have to develop the mindset to let go – it may sound simple but is very difficult as you have been the hands-on person all your life.

Becoming an Owner/ Leader

You should trust the person you have appointed to run your business and refrain from interfering on a daily basis in running of the business. You are now an owner/leader and no longer the hands-on person … it is time for you to now relax and work towards a strategic view of your business and growth.

Your focus now should be on finding new investments and increasing the profitability of your business. Maintaining a healthy cash flow is the responsibility of your manager. Although you are not involved in running your business on day-to-day basis, you must keep a tab on your business from monthly/ quarterly or through annual reports.

You should intervene only when things are not progressing as planned.

Once you reach this stage, you no longer have to perform any physical activity in running your business. Your income from the business becomes passive—this is where the fun begins. You will be devoid of any daily pressures of running a business. This will give you time freedom to read, meet people, grow your business network and prepare yourself to next step of financial growth and challenges.

At this stage, your focus should be on building capital to invest in other businesses. This is important if you wish to become rich and wealthy. After this stage, you simply become an investor. You buy assets that will give you even more passive cash flow.

active investor

What Skills Are Needed to Become a Knowledgeable Active Investor?

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Many active investors make huge loses because they lack financial skills or do not have adequate control over their investments. To become a sophisticated investor, you have to master the following skills:

Knowledge of Taxes

Taxes can make or break an investment. An otherwise attractive investment opportunity may have a huge downside after taking account its tax implications. It can erode the bottom-line.

You must have knowledge or seek advice on the tax implications of an investment. This will differ from person to person depending upon the financial situation. A knowledgeable investor can gain higher returns with low risk after studying the implications of tax law, corporate law, securities law, capital gains tax, stamp duty etc.

Management of Investment

When making an investment you must take into account on how you will manage the investment.

active investor

Some investments are messy and very difficult to manage even though they may promise very high returns.

For instance, it may be very attractive to buy a property or business overseas as it shows excellent cash flow and growth prospects. Your financial analysis may be right but before making such investments, you should take into account travel and administrative costs to manage the investment.

You will need to create legal entities in a foreign country, hire a tax accountant and managers to look after your asset. You have to understand time and management cost of an investment before rushing to make a decision.

Brokerage

High brokerage fee can sometime make an otherwise good investment into an average one. There are many investments that have re-occurring brokerage fees. Many times, it is only the broker who makes a profit and not you. An example of this is when you buy a property in an area that does not have stable tenancies. Re-leasing cost will dramatically reduce the net return from your investment.

Control Over Income and Expense

A good investment is when you can exercise control over income and expense of your investment. Investing in hotel units on profit share basis may sound very attractive especially when you can live in them for 2 to 4 weeks each year. Unfortunately, in such investments you neither have control over the income or expense. In most cases, returns from such investments are extremely poor.

Information

Information is the key to making sound investment decision. If you do not have adequate or transparent information about an investment, refrain from buying it. Always cross check the information provided to you for its authenticity.

Don’t get duped by slick salesmen who appeal to your greed and put you under time pressure into making decisions with incomplete facts about an investment. Warren Buffet says that secret to his success is that he spends 80% of his time reading financial reports.

Terms and Condition of Agreements

It can be tedious reading through fine print in most agreements. This is especially true for agreements drafted by crafty lawyers of big corporations to be signed by small-time unsuspecting investors.

Most novice investors sign agreements without knowledge of the implications of certain clauses in the agreement. These can come to haunt you when you least expect. Ask anyone who has gone through an insurance claim.

If you are not sure about a clause, seek legal advice. It may cost you a little in the beginning but save you considerable amount of distress later. Best situation is if you have the control of setting your own terms and condition of an agreement.

Buying and Selling

You should have control over buying and selling an investment. There are investments that have long lock-in periods. It is best to avoid them.

By having control over buying and selling, exiting an investment if things go wrong becomes possible. It can also give you much needed liquidity in times of distress or if you wish to invest in a better opportunity. Remember there will always be a time when you will need to sell a long-term investment to maximize your profit.

Management Control

This may not be possible for small-time investors but when you make major investments then always endeavor to have some management control. This will give you inside information regarding your investment.

While starting out, you may not be able to gain control in large corporations. It may be better for you to investment in small and medium size companies depending upon your budget. Better still, start your own company that gives you total control over your investment.


Business Entity

A knowledgeable investor creates entities not only to take advantage of taxes but also to protect the asset. These include forming Corporations, Limited Liability Companies, Trading Trusts and Family Trusts. It is best to seek legal advice as this will depend upon your situation, country you live in or location of your investment as laws differ for each country and sometimes states.

types of investors

Types of Investors: Which One Are You?

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It is extremely important to understand the types of investors and which one are you before you start investing your hard earned money.

types of investorsInvestment basically means, ‘Make money with money to become wealthy.’ As an investor, you are interested in Return on Investment (ROI).

You can either be an employee, self-employed or a business owner to be an investor. They all may be investors but they operate at different levels of cash flow and knowledge. For example: an employee invests money that grows with time. This is because the principle of compounding works with time. On the other hand, a business owner –when he buys a new business – is basically leveraging other people’s time to grow rich.

Types of Investors

There are basically two types of investors:

  • Passive Investor – A passive investor is the one who is either an extremely busy person or a person who lacks the knowledge to make investments. These people either trust their money to fund managers or buy mutual funds to diversify the investment risk. This generally results in very slow growth of investment portfolio. In the majority of the cases, these investors only make money if the market is moving up. Their investment loses value if the market value of the investment goes down.
  • Active Investors – These are investors who take the effort of learning about investing. Most active investors take time to analyze and find deals that are below market value and therefore give higher returns. They actively follow the market trends and carry out both technical and fundamental analysis of their investment before buying. They make money irrespective of market dynamics, whereas passive investors are satisfied with a 10% growth in their investment each year an active investor looks for 20–50% or more. They understand risk and take steps to contain than risk.

Types of Investments

There are basically three types of investments:

  • Real Estate – This is simple, robust and most forgiving to mistakes. Property prices move very slowly and therefore do not require constant monitoring. Real estate investment also provides financial leverage that investing in stocks and businesses do not provide. It, however, requires a deposit and cash flow income for banks to approve your loan.
  • Stock Market – Investing in stocks requires knowledge to get started or you may land up losing your principal amount. You also have to monitor your investment regularly as stock prices fluctuate constantly. You have to buy stocks at market value. They can never be purchased at a discount. There is very little financial leverage as banks hesitate to give loans against shares. To make serious money out of stock market you must become sophisticated and accredited investor. For this, you need assets worth $ 1 million and an annual income of over $200,000 in USA. This amount can differ in other countries. Once you are an accredited investor, you will be able to invest in securities that give higher returns but also carry higher risk. If you have limited knowledge or no time then stick to buying mutual funds. Buy index funds that track markets such S&P 500 funds, BSE, ASX etc. These funds operate without interference from fund managers and carry no management load and therefore give higher returns. It may seem strange but statistics show that very few fund managers beat market on regular basis.
  • Businesses – This gives the highest returns if you can buy low performing businesses for cents to a dollar and turn them around for profit. However, you need to have experience as a business builder to turn around companies in your area of expertise. For inexperienced operators and first-time buyers, it is advisable to either buy a reputable franchise business that have all the systems in place or a well-run business. After you have gained experience in operating a business for couple of years and gained some confidence, you can look to buy businesses below their value and increase profitability by increasing the turn over and reducing costs through better management.