Investment and Business: What is the difference?

Investment products create wealth for their owners by generating a return or interest. And there is a whole range of them, including savings accounts, money market funds, certificates of deposits, shares, equity funds, mutual funds, retirement annuities, pension funds/401k and many others.

For example, by investing in a unit trust, a financial service provider will take your deposit (or capital) and give it to their asset managers. The asset managers will then invest their capital in various markets depending on the product, hoping to generate a specific return.

The return due to you, less all administration costs, is the value the product can extract from the financial markets at a given time. Performance is based on the state of the financial markets. Generally, when there is an economic boom, returns are good. When a recession, like the recent 2008 credit crisis, returns could be disappointing or absent altogether.

But that also depends on where your money is invested. In an economic boom, fixing your money in a bank deposit for five years may not be a good idea because you may miss out on higher returns in the stock markets. In a recession, it may be a bad idea to place your cash in an offshore investment in Europe, considering the economic turmoil they’re currently experiencing.

Like investment products, the purpose of any business is to create wealth. But instead of working in financial markets, most ventures generate revenue by creating value for customers. A company in the right market selling the right stuff to people who need it will do well. Enterprises that do not cater to the needs of consumers or service the incorrect markets may end up bankrupt.

So, how could businesses be similar to products investing in developing African countries or gold shares? Yes, each vehicle’s methods, tactics and operations to create value in their respective worlds differ greatly.

However, both vehicles use the same strategic principles to build wealth: the five Ps of wealth creation.

1. The first “P”: Purpose

Any wealth creation vehicle, investment product, or business aims to achieve financial success. A company seeks to generate revenue using products and services, whereas an investment seeks to produce a return using financial markets.

2. The second “P”: Price

You know that old saying, ‘Everything comes with a price’? Well, the same thing applies here. Businesses allocate prices to their offerings, and this dictates profitability. Undercharge, and you’ll lose out. Overcharge, and you risk losing market share to competitors.

Price is equally as important in investing, especially when purchasing a product. If you buy gold when the price per ounce is $1000 and sell one year later when the cost is $500, you’ll lose $500. If you buy when the demand for gold is very high, at $1000, and sell at $1500 three months later, you make a profit of $500. Overpay and you could lose out. But when the time is right, you could realize a handsome profit.

3. The third “P”: Place

‘Place’ tells you how businesses gain access to their target market. Some do it using physical store locations like franchises, while others do it by distributing licenses to sell their intellectual property over the Internet.

Investors gain access to financial markets in various ways. Some do it by investing in specific markets like commodities or stock markets. Others spread their investments across different markets, while many may restrict their cash to particular service providers like banks or certain financial houses.

4. The fourth “P”: Product

You don’t have a profit-making business without a product or service.

The same can be said for investing. You need a product to access the market of your choice. Money market funds, for example, allow you to play in – you guessed it – the money market. Fancy instruments like derivatives enable you to trade in virtually any market. Funds like ‘balanced funds’ allow you to simultaneously invest your money in many markets. Buy-to-let property or commercial property is your gateway to the real estate market. There are many products at your disposal. Your objective is to service your needs by selecting the right product for the right market.

5. The fifth “P”: Person

Remember, in high school English, the whole ‘first,’ ‘second’, and ‘third’ person sentence structure. Well, wealth creation is a first-person business. It’s all about you. Not him. Not her. Not them.

You are responsible for formulating a strategy to create financial freedom in your life. That means defining your purpose, selecting a vehicle, your products, and your markets, and determining the required tactics to succeed. And by all means, get other experts to assist you, give you advice, or even do all the technical bits.

Remember, you need to be the primary decision-maker. This may really sound stupid, but you are the only person who is best placed to know what’s right for you—no one else. What usually happens, particularly in investing, is that people transfer all wealth creation responsibility over to a third party and expect them to deliver. Not good. It generally ends up being a blame game. You blame them for your financial misfortunes, and they blame the markets or economic situation for everyone’s misfortunes.

Conclusion

Wealth creation is a business. It deserves that much of your personal attention. In most cases, it requires some of your own resources to get it going. A $1000 invested in an investment product should be taken as seriously as $1000 used in setting up a hot dog stand, for example. First, commit to wealth creation, understand what you want out of life, and implement the five ‘Ps’.

I hope you enjoyed it, and all the best for the upcoming week.