Investment decisions you make today can have a far-reaching effect on your life tomorrow. Your investment decisions today will surely determine your financial status in future. As a matter of fact, the quality of your current financial status is a direct reflection of your past investment decisions. It is very important to note that decision encompasses both your actions and inactions. That is, failure to take advantage of an investment opportunity is a decision and similarly, taking advantage of the opportunity is equally a decision. You can neither sit on the fence nor remain neutral. If you buy a car today instead of buying the share of a company, it is an investment decision. If you keep your money a fixed deposit account rather than buying a house, it is an investment decision. In short, your decision not to invest is an investment decision which will ultimately determine your financial destination in future. How do you make right Investment Decisions? For you to make the right investment decisions there are things you must understand.
Investment Is Not Gambling
Most people approach investment with a gambling mindset. That was the situation in Nigeria during the capital market bubble. They dealt with investments, especially capital market investment as if it was one lottery program. They played the game like a game of chance. For example, the fact that everybody in your office and other people around you are buying the shares of a company should not be the criteria for your decision to invest in the share of the same company. Before you part with your hard-earned money, you need to find out why people are rushing to invest in the company. You should then find out if their reasons make economic sense or not. If the only reason is based on the expectation that the price will go up, I am afraid what they are doing is nothing but gambling. Meanwhile, don’t forget that in gambling, someone must lose for somebody to win. Why then will someone risk his future on a game of chance? Anyway, my advice is that, you should not make an investment decision just only because of price appreciation. You know why? Such decision is based on a parameter which is absolutely outside your control. And you know what happens when you don’t have control over something, you are at the mercy of the person who has control over it. However, considering the fact that investment decision can have a far-reaching consequent in our life, it should never be left to chances
Cash Flow Is More Important Than Price Appreciation
An investment that gives you positive cash flow immediately you subscribe to it has a better chance of making you rich than the one you need to wait until the price goes up before you can sell and make your money. The issues with price appreciation strategy are many:
1) You are taking bigger risk because as I said earlier you don’t have control over how and when the price will go up.
2) The price may actually go down, especially for capital market investment, if you enter at the peak of bullish market.
3) Price appreciation strategy limits your capacity to invest and grow your wealth. This is simply because you need to continuously work hard to save money for other investment opportunities. Consequently, you forfeit the advantage of having your money working hard for you.
Let me use a simple scenario on real estate investment to illustrate the importance of cash flow. Assuming you have two investment opportunities, namely, investment A and investment B. Investment A is a plot of land with potential for price appreciation, while B is a commercial rental property with the potential for immediate positive cash flow of N2 million per annum from rent, ignoring the agreement and caution fees which can also be collected. For simplicity purpose, let us also assume that both A and B costs N25 million Naira each. If the price of A and B has increased by 100% in the next five years, it means you can sell and make a profit of N25 million on any of them. However, if you chose investment B you will also earn additional N10 million. This extra N10 million can be invested in other similar investments which will definitely make you richer. You can see that cash flow approach gives you a better edge in you quest for financial success, you earn extra income and you still enjoy the benefit of price appreciation.
Other Investment Alternative
It is also very important to consider other investment options before making your investment decision. At every point in time, you have several investment opportunities out there. You need to be conscious of the fact that among these opportunities, we have bad, good and great investments. Your goal should always be to identify great investments and take advantage of them before you touch the good ones, while the bad ones should be avoided. A way to do this is to check out other investments and compare the returns on them. Before you make that investment decision, take your time and carry out proper research before you part with your money. For example, if you are planning to invest in a company, you need to ask the right questions about the specific company and the industry. Before you make your decision, consider all the variables, the overall performance in the industry, the Macro and micro economic condition of the country and its current and likely future impact on the industry where the company plays, the profitability of the company, the issue of corporate governance in the company, does the current market price make economic sense? Please don’t just follow the crowd to invest. It is very important to learn from our past mistakes. I am aware of the fact that money market is no longer attractive due to the low-interest rate. Consequently, people are shifting their focus to the capital market. I also know that the best time to enter the capital market is during the bearish trend. However, it is very important to act with understanding and great caution.
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