Retirement – Financial planning (X)

Last week we discussed moonlighting as a pathway for going into business for persons employed and in phase II. Today we will discuss other investment options that persons in that phase can consider. Investing in businesses: Some people ‘do not have’ the temperament and/or time to engage in moonlighting but are interested in making more […]

Last week we discussed moonlighting as a pathway for going into business for persons employed and in phase II. Today we will discuss other investment options that persons in that phase can consider.

Investing in businesses: Some people ‘do not have’ the temperament and/or time to engage in moonlighting but are interested in making more money than their paycheques and other employee benefits may provide. Investing in businesses that others run could be an option. The difference between moonlighting and investing in a business that a person does not run is basically that you probably only provide funds and other one-off/incidental support that may be required by those running the business. In return, you earn a part of the profit made and could also enjoy capital appreciation over time depending on the performance of the business and its equity pricing.

The experience of most people with this option in our environment is generally not pleasant. But I think there are ways around it that may not necessarily guarantee any preferred outcomes but can mitigate against what I will call inattentive losses particularly from incompetence and fraud by the persons running the business.

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• Invest only in a business that is already doing well but can do much better with some additional resources and support that you can provide. Even at that, you need to go in gradually as you monitor improvements and build trust. 
• Invest only in business managed by competent persons of integrity.
• Document the agreed terms of investment and give all the legal endorsement that makes it enforceable. The agreement should make mandatory the submission of periodic reports that you can always verify. 
• You can start by protecting your investment through a charge on a particular asset or assets until some level of performance is achieved over some time. This technically makes the funds you provide a loan. But you agree to convert it into equity whenever you are comfortable with the management and the business performance. Note that the comfort you get by making it a loan means you may need to do with lower possible returns.
• Depending on the type and size of the business and how much you are investing, you may negotiate to be in the authorisation structure of all payments out of the business accounts. 
• Do not take undue advantage of the business and the operators by trying to exact ‘too much’. That may hurt you if the management accepts your terms but decides to be less than scrupulous. Protect your interests but be fair and supportive. 

Regardless of everything, what you are comfortable doing. 

Invest in financial assets: As an employee, I made two types of wonderful returns investing in financial assets. First, I invested parts of my discretionary income in what I considered blue-chip companies. From the get-go, I was clear that the investment was for the long run. I hardly checked the stock prices until after a few weeks. Over time, I earned dividends and got reasonable capital gains. But I also made ‘speculative’ investments in some IPOs that I believed (read: assessed) were going to do well. Again, I was clear from the get-go that it was going to be but a short-term investment. I resolved that the moment the stock got to some level I was happy with, I was going to offload them. When some of the stock made one hundred per cent (and more) gains over a few weeks, I immediately sold them and paid the substantial margin loans I took for them. I was happy and did not care whether the stock went on to do better. With hindsight, it was obvious I sold at the peak of the market. (I lost money in only one stock for a reason to be mentioned below).

Investing in financial instruments such as equities, bonds, etc. are veritable ways of making money. Each has its own ‘advantages’ and ‘disadvantages’. Each is appropriate for different individual objectives, temperaments and risk affinities. Each may be more appropriate for different phases. The questions we must ask will include:

• What is the purpose of the investment I want to make? For instance, am I after short-term liquidity or long-term capital appreciation? Or do I want to draw on the investment to fund a child’s university education or do I want the long-term dividend to fund part of my needs in retirement?
• What risks are acceptable at the stage I am?
• What is the likely return vis-à-vis the risks for each option and how does it compare with inflation? 
• What am I comfortable doing? etc.

I think beyond all the questions we may ask ourselves and the answers we may provide, what is crucial is for us to have an objective and a plan. The best decision I made was to stick to my plan of offloading the shares I mentioned above when they hit a mark I was happy with despite the general perception among the investing community that they were going to get even higher. The only stock that I lost money in, mentioned above, was because contrary to the strategy I carried out for the others, I followed the general sentiment of the investing community. Both my right and wrong approaches, I think, support the argument of world-renowned investor, Warren Buffet who said, “…be fearful when others are greedy and … be greedy when others are fearful..” 

Next week we will take up investing in physical assets.