I like to share with you what I have learned from an article I read this morning.
This article gives a distinct and useful differentiation between a good decision and a good outcome. A good decision is a logical one while a good outcome in the context of investment is a profitable one. We all want good outcome but how many of us will spend the time and effort to make a good decision. This is especially so when a good decision doesn’t necessarily guarantee a good outcome.
When we have a bad outcome (aka lose money), many of us will say that we make a bad decision. But is that true?? I am sure you have experienced bad decision turns out good outcome (lucky loh ).
Many of us tend to rely on our experience and instinct when it comes to stock purchase. We enjoy the “high” feeling of picking the right stock and boasted about our windfall. We crave for such feeling again and again. I admit I do.
However, as a serious investor who is planning to use his/her savings to make sure that it generates income for him/her to be able to make life choices in future, this form of investing is leaving too much to luck.
While good decision does not guarantee good outcome, it’s the best way to increase your odds of having a good outcome. So what does a good investment decision depend on?
This article argues that it boils down to 3 simple questions:
1. What do you want?
2. What you can do?
3. What you know?
The first question is about our preferences, our investment motivation. We need to be very clear what we are gunning for – rate of return, time frame, as an active or passive income. What’s important to us? Eg will you invest in a tabacco company?
The second question is about the alternative investment products we can get our hands on. Knowing the available products to us is important. We can then compare their trade off between gains versus risks/exposures. We also understand the opportunity cost incurred with each decision.
The third question is about the context and information we have access to. We need to be able to gain access to our relevant information to our decision and make use of them efficiently and effectively. Like they always say, each decision should be made with the best available information we have at that moment. If we have, then there should be no regrets.
Timing is critical in the investing world. Knowing clearly what information we use and what assumptions we made will allow us to quickly update the analysis with new information that emerges along the way to come to new decision faster than others.
Hence, unless you want to leave everything to luck and chance, it is always worthwhile to understand your investment objectives, what products are available to you, do your own analysis and research before investing your hard earned money. Resist the temptation of speculation if you are in this for the long term and for a meaningful passive income.
Wishing all of you good luck on your journey towards financial independence and then freedom.