Invest My Way
Essential reading for casual investors, including baby boomers, retirees, SMSF trustees, and anyone else interested in trading or investing long term in Australian blue chip shares. Alan Hull has been investing in blue chip shares for decades and is one of Australia's most respected sharemarket experts. He has appeared on Sky Business Channel and is a popular speaker on the seminar circuit. Alan is the bestselling author of Active Investing and Trade My Way which, together with Invest my way , provide readers with a complete stock market solution.
Invest My Way
Part I: The business of investing in blue chip shares
Chapter 1: What is an investor?
I always like to start any discussion by defining terms, just to make sure we're all on the same page (excuse the pun). So let's start with a succinct definition of the word invest , taken directly from the fourth edition of the Australian Concise Oxford Dictionary: Apply or use money for profit .
That sounds simple enough, but to really understand the full impact of this statement we need to answer some other questions first and, while they may seem completely unrelated, I would suggest they are not.
- What is a worker?
- What is a manager?
These seem like simple enough questions, but if we probe beyond the brief and obvious answers, we will uncover some very interesting definitions and distinctions.
Put very simply, a worker is someone who works for someone else in exchange for money. But if we want to be a little more precise about this apparently straightforward function, then we could also say that a worker is someone who sells his or her time for money, and that time includes both that person's labour and expertise. A typical working situation would be an individual who spends 40 hours per week working for someone else in exchange for approximately $65 000 per year. This is a typical situation, given that these parameters are based on the current Australian averages for hours in a working week and annual wages.
The average person will spend about 40 years of his or her life (from the age of 20 to age 60) working for someone else in order to finance their lifestyle and, hopefully, their retirement. For our purposes, we will define a worker as someone who is directly involved in the process of manufacturing a product or supplying a service. A self-employed person is someone who is a self-managed worker - that is, he or she both manages and is directly involved in the process of manufacturing a product or supplying a service. But if, for instance, someone oversees the production of goods but doesn't have to be directly involved in the production process itself, then he or she would fit into the next category - manager.
A manager is someone who controls a system or a process as opposed to being directly involved in the process itself. While it may be argued that a management role is in fact a form of work, and therefore a manager is a worker, for the purpose of this discussion we will define working and managing as two distinctly separate functions or roles. For example, although managing my investments does take time and some degree of effort, it would be inaccurate and somewhat misleading to say that I'm working my investments.
Now that we've clarified the difference between these two functions, let's apply this understanding to acquiring money. In the first instance we have the worker who sells his or her time for income; this is the most common and conventional way for any of us to acquire money and unfortunately very few of us go beyond this simple method of feeding and clothing ourselves.
But the few of us who do, see ourselves as managers where we control systems or processes that generate money - we are businesspeople. Harking back to the example of my investments, I manage (as opposed to work) my portfolio of blue chip shares, which takes about 20 minutes per week. Or, to put it another way, someone who manages a system or process that generates money is said to be making money as opposed to a worker who sells their time to someone else to earn money.
Now we come to the meat of the matter, because any business that utilises financial products, such as shares and property, is said to be an investment business. And finally, anyone who manages