What is the Difference between Investment and Business
In principle, there is no difference. They are two cogs on the same wheel.
On the surface, an investment product and a business may appear to be worlds apart. One vehicle involves investing your money in financial markets and the other functions by selling products and services to people.
Investment products create wealth for their owners by generating a return or interest. And there are a whole range of them including savings accounts, money market funds, certificate of deposits, shares, equity funds, mutual funds, retirement annuities, pension funds/401k and many others.
By investing in a unit trust, for example, 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 that the product is able to extract from the financial markets at a given point in time. Performance is based on the state of the financial markets. Generally, when there is a financial boom returns are good. When there is a recession, like the recent 2008 credit crisis, returns could be disappointing or absent all together.
But that also depends on where your money is invested. In an economic boom, it may not be a good idea to fix your money in a bank deposit for five years 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 business placed 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 being bankrupt.
So how could businesses possibly be any similar to products investing in developing African countries or gold shares? Yes, the methods, tactics and operations used by each vehicle to create value in their respective worlds differ quite a lot.
However, both vehicles use the same set of strategic principles to build wealth, namely the five Ps of wealth creation.
I. The first ‘P’: Purpose
The purpose of any wealth creation vehicle, investment product, or business is to achieve financial success. A business aims to generate revenue using products and services, whereas an investment aims to produce a return using financial markets.
II. 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 price is $500, you’ll make a loss of $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.
III. 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 the commodities or stock markets. Others spread their investments across many different markets, while many may restrict their cash to specific service providers like banks or certain financial houses.
IV. The fourth ‘P’: Product
Without a product or service, you don’t have a profit-making business, right?
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 invest your money in many markets at once. 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.
V. The fifth ‘P’: Person
Remember, in high school English, the whole ‘first,’ ‘second’, and ‘third’ person sentence structure thing. Well, wealth creation is a first-person business. It’s all about you. Not him. Not her. Not them.
It is your sole responsibility to formulate a strategy to create financial freedom for 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.
Key take-home message
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.
