Think about buying and selling something – let’s say bicycles for example. Now, let’s assume you can make 10% return on the sale – every time. So you buy a bicycle for $100 and sell for $110 making the 10% return. Pretty simple so far and looking at this approach it is easy to see that the more bicycles you buy and sell the more money you will make. This is turnover and is a very important piece of making money – critical actually.
Now, let’s take the bicycle example and pursue it a little further. Let’s say you are able to “turnover” your inventory of one bicycle 5 times in a month; again pretty simple. So you start your business by investing your $100 in one bicycle on the first of the month and sell it on the third for $110 so you are up 10% on your money already.
Let’s continue with this approach by buying another bicycle on the 5th for $100 and sell it on the 7th for $110. Now you are up $20 on the original $100 and you have only had to do the same thing twice. It is also easy to see that you are now up 20% on your original $100. You can also likely see that the amount of money you can make is only limited by the number of times you can buy and sell (turnover) a bicycle.
Again, let’s go further. Let’s assume we are able to “turnover” 10 bicycles by the 25th and therefore we now have $200. If we buy 2 bicycles with the $200 and sell both we make $10 twice or $20 which is now 20% of the original $100.
Now, let us have a look at percentages. Although we are only making $10 on each bike sale or 10%, we can see that we have done it 10 times by the 25th for a total of $100 earned or 100% of the original amount. Starting on the 25th we are “turning over” two bicycles at a time on the 27th and the 29th for another $40. The end result is that by the end of the month we have made $140 of income on the original $100 which is 140% return.
Changing gears now to look at investments instead of bicycles I want you to continue to think of it in the same way. Don’t make it complicated when it is not. You will only be buying investments instead of bicycles. And there are things that make the buying and selling easier for investments rather than bicycles. There are also some things that can make it more difficult too so we should look at that also.
What is easier for investments
If we think back to our example of buying and selling bicycles we must ask ourselves where we can buy the bicycles and more importantly, where will we sell the bicycles! When it comes to buying and selling things, both the supply of our products and the market for them is critical or we are out of business. In the investment world however this is not an issue at all. We need not spend any time looking for supply or market because both are readily available all the time. That has to make it easier! Imagine being in the bicycle business and knowing that there is an unlimited supply of bicycles available and an unlimited market for your bicycles. Your only concern then would be ensuring you make the 10% return on each “turnover”.
Now you can begin to see why it is easier to buy and sell investments than products – no supply issues or market issues. This is also why stock traders build systems to buy and sell stocks using computers that can create “turnover” by the thousands with a little gain each time, thus making a fortune.
Another advantage of stock investing is that you can buy “partial bicycles” so that you can increase your investment as you make returns. More on this later.
What can be more difficult for investments
By now you may be thinking that it is simple to make money in the market – hmmm, not so much! The problem that we must manage, the only one left, is the return we make on each “turnover”.
For our bicycle example we were talking about a 10% return on each transaction, then repeating the transaction multiple times. Again, this sounds simple but may not be so in the stock market. Don’t get me wrong, good returns per transaction can be found but care must be taken.
As an example here, let’s imagine that you have bought stock in a car company – great company and you expect that based on your analysis that the stock will increase in value by 5% over the next month. You then read that the company has been cheating on environmental standards testing and the value of the stock drops by 30%! Don’t think it cannot happen – it just did! So care must be taken and you need to have an appetite for risk to do well.
Let’s look at what can be done
Now that we have looked at what is easier and what can go wrong, let’s have a look at what might be possible to achieve and at competing investment approaches, like banks.
I just looked up the rates for GIC (guaranteed investment certificates) at the Royal Bank. They are paying 0.75% in year 1 and 1.25% in year 2 of a two year GIC. I should go back and put an exclamation point on that last sentence – the bank will pay you $20 in interest if you let them use your $1,000 for two years!!
So now that we know that the competing investments are paying almost nothing, let’s look at what we might achieve in the stock market. The bank pays about 1% per year (and remember that inflation is running nearer to 2%) – can we do better? Let me give you some examples.
– Royal bank stock on September 29, 2015 was up 1.3%! In one day. That is the same bank that proposes to pay you 1% per year.
-. Imperial oil stock on September 29, 2015 was up 1.6%, again in one day!
– Suncor Energy stock on September 29, 2015 was up 2.6% in one day.
As you can see there are lots of opportunities to generate a better return than banks will give you. As a good example, if you can make the 1.3% return on a bank stock just once per month, you will have a 15% return for the year -15 times what the bank will pay you. At a 15% return you will double your money in 5 years – not in the 100 years at the bank’s interest rate.
I mentioned earlier that with investments you can buy “partial bicycles “. Let me explain what I mean by that. In the example we discussed where we were buying and selling bicycles, it wasn’t until the 25th of the month that we had made enough money to be able to buy 2 bicycles at a time and therefore speed up the rate at which we were making money by using all of our money each time we invested. When we are looking at investments it is easier to use all of our money each time we make an investment. The example I will use here is an investment in a company called Silver Wheaton. (Silver Wheaton is a silver streaming company which means they buy the silver by-products from other mines. For example, a gold mining company likely finds some silver when they are mining gold but may not be as interested in the silver as a main product and might choose to sell it to Silver Wheaton.) I will explain silver streaming in more detail in my next post in a couple of days.
The price of Silver Wheaton (slw) was $15.87 per share yesterday – think of this as the price of a bicycle. Now imagine that you have enough money to buy 100 shares of slw or about $1,600. So you decide to buy slw on the 1st of the month for $1,587. After about a week, let’s say the price of slw is now $16.52 and you decide to sell your shares for a gain of $65 or a gain of 4.1%. This will give you $1652 to invest which you decide to invest in Royal Bank stock for $72 per share. With this amount, you can buy 20 shares for $1,440 so you can see that you have again used most of you nest egg to invest. After a month, the bank stock has recovered to $76 and you again decide to sell for $1,520 so now you have a total of $1,732. In the month, there has been talk of the Fed (Federal Reserve Bank ) raising interest rates (which pushed up the value of the bank stock) thus the slw stock you had purchased a month ago has gone down to $14.80 a share. Your sense is that the Fed will not raise the rate and also that slw is worth more than $14.80 so you use your $1732 to buy 117 shares. A week later the Fed announces that it is too early to raise rates and your slw stock immediately climbs back to $17.56 per share and you sell. Now you have $2,054 after only 2 months of investing (or trading) for a gain of 29% in 2 months.
If you had put you $1,587 in the bank it would be worth $1,589.64 now instead of the $2,054 that you have.
I hope I have given you something to think about by writing this post. My goal was to show you that you have options on building your wealth and to make you aware that there is also a big risk to your future wealth if you avoid risk and invest with the bank.
I have made the investment approach look easy too, so keep that in mind as it is also very possible to lose on you investment decisions as Volkswagen shareholders have just seen.
Remember though that turnover is a very important piece of investing and building wealth. Give it a careful try.