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Tuesday, 13 March 2018

How Warren Buffett Convinced Me to Invest & Not Speculate

10:10 Posted by cheez No comments

This quote was the reason that convinced me to invest instead of speculating, to invest long-term instead of short-term. Investing to me is putting money to work to build the future. That is why we say "invest in infrastructure", "invest in human capital", "invest in healthcare" etc. It is because it is not a guess or gamble. Investing has a purpose, has an output, and is beneficial to the economy. Imagine someone saying "let's speculate in our infrastructure, human capital and healthcare". How scary is that!

Using Warren Buffett's example, imagine you are stranded on an island with another 99 people (total 100 people on the island). In order to survive, the people are grouped and allocated different tasks:

10 wheat farmers
10 corn farmers
10 pig breeders
10 chicken breeders
10 cow breeders
10 fishermen
10 dig wells and cleanse water
10 build houses
5 auditors/accountants
5 police to ensure law and order
5 leaders to govern the place
5 traders

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The leaders created a currency (stranded dollar) to facilitate the business transaction between the people living on the island. You know what 95 people on the island do: they produce some sort of output that ensures that 100 of us survive. There are people making food, water, homes, security, etc. But there are 5 people who produce no economic output. They basically come together every, sit at a round table, and start betting with one another how many pigs is the pig farmer going to have by end of the year, how many fish will the fishermen catch etc. These "talks" create no positive economic output to the society.

Today, a large number of people are participating in this form of mindless activity. Not everyone on Wall Street is speculating, they are also providing a form of service - a positive economic output. They provide us with insurance, facilitate money transfers, provide retirement advice etc. But way too many are speculating on asset prices and other assets.

For the average mom-and-pop investors, I would recommend investing for the long-term, invest instead of speculating. It is really not that difficult, it can be as simple as a savings plan except instead of money accumulating in a savings account, it gets invested in the stock market. But that is beyond the scope of this post. Read up on why it is easy HERE.

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