What is Investing?
Investing is defined by Merriam-Webster as:
So, we give someone else our money, in order to make more money. When I have extra money, I can choose to spend it in several ways. I can spend it:
- buying things that bring me immediate pleasure
- buying things for other people that bring them immediate pleasure
- leaving it in the bank to be immediately available to me
- invest it, making it grow to provide more money for me.
If I buy things for myself or others, I have paid my money for a passing moment. I may have fond memories of that moment. I may find the things I buy useful, but at the end of the day, the money is gone. I have a “return” of immediate pleasure.
If I leave it in the bank to be immediately available to me (I’m thinking a simple checking or savings account in this case) then I get neither the immediate pleasure nor the “extra” money that I would have from investing it. I have no “return” except perhaps to feel safe in an emergency.
If I invest it, my hope is that I will gain more money. That money in addition to my original money can then be used to buy me or others things at a later date. I have a “financial return“.
A phrase I have heard often is that investing is like “making your money work for you.” This is a nice sounding phrase but what does it mean? It essentially means that the money you give for investing is working, like you work. It does it’s job making more of itself, just like I do my job at the company I work.
The problem I have with this phrase is that it makes it all seem too easy. It doesn’t mention how that “financial return” comes. It comes because you take a “risk“. There is no investment vehicle where you give your money to someone else and make more money, without risk.
How is this different from gambling? It doesn’t seem to be different at its heart to me. However, investments sites consistently claim that the money they get back is real. In fact, I consider investing to be like a game. In any game, you need to risk to find reward and you need to manage those risks to survive. It’s the same here. That’s what this whole series is about. Managing those risks.
So, to summarize:
- we invest to get more money.
- we do this by giving it to someone else
- we take a risk that we may not get that money back.
- we work to manage those risks so we have a better chance to get our money back
I hope you’ve enjoyed my babbling about something so basic. Sometimes working these things out in writing really help me to keep them in the forefront of my mind.
I do plan on doing many other posts but do you think I missed anything here? Am I off-base in any of my statements?
