Without doubt, time is the greatest ally in ensuring capital growth. Time reduces risk and consequently increases returns.
In fact, the very term ‘investing’ mandates that money is kept invested long term, at least, for a good number of years. Conventional wisdom suggests this period to be at least five (5) years. Month-to-month, or, even year-to-year ‘investing’ is really doing trading. There is nothing wrong with it. It simply is an active means to make money. It is active entrepreneurship. It clearly is not passive investing.
In reality the concept of long term growth is applicable to all modes of income generating activity. Whether you are an active investor or a passive one, the underlying business and/or assets you put your money into require time to grow.
In the case of financial asset classes like equities, fixed income securities, and/or derivatives thereof, volatility is an inevitable partner. Values fluctuate in narrow or wide ranges depending on the nature of the asset class. Stock prices represent the highest volatility as do commodities. The fundamental determinant of such values are really market perceptions by both direct and indirect (professional fund managers) investors. These active players, in turn, make their decisions in accordance with their respective financial guidelines which most of the time are short-to-medium term in character. These intermediate investment players are more concerned in keeping up with industry or market returns. Thus, they tend to drive prices up or down short term without true correlation to the asset or business value that they trade with.
While this may seem bad, it is not so, provided the real investor focuses on his absolute returns, the absolute amount his investment have grown to. This absolute number must translate to a return that beats the average inflation rateover the period of his investment. His end game is to preserve if not increase his purchasing power.
In investing in financial assets such as equities, the simple guideline for sustainable growth is to invest long term in companies, which have serious fundamentals (growing market sustainable technology, sound capital structure, proven management team, etc). Choosing what equities to buy is the first step. When to buy and when to sell is another. Here, the investor needs to be advised of the ‘technical’ in the capital market. The ‘technical’ provides the guidelines on the timing of the buy and the sell. For the end investor, his main guide is the absolute returns he has set at the onset of investing. He must cash in when this goal is achieved. And after doing so, a new cycle of investing begins.
This passive investing process applies as well to an entrepreneur planning to start, or may actually, be in the early years of his enterprise. An entrepreneur should realize that success is never instantaneous. He should always have a long-term vision of his goal. He should prepare himself to face the ups and downs that will plague his venture. He must have a sound businessmodel based on realities of his market and environment.
His value proposition to his market must be clearly communicated and appreciated by his consumers. In addition, he has to accept the reality that only time will prove him right. Apart from Time, the entrepreneur must also keep in mind that he needs to grow and Compound his knowledge and that he can only do this by Leveraging his technology and market reach with both his own management team and other relevant professionals and supporting organizations.
In active and passive entrepreneurship, the same Allies, which are Time, Compounding, and Leverage hold true.
In Chapter 6 of my book Wealth Within Your Reach, I discuss ‘Your Allies to Financial Freedom,’ which are these same allies you, as an entrepreneur, need to grow your business.
All of us have the same amount of time. Twenty-four hours per day, seven days a week, 12 months a year. It is important to consider time in planning and ‘timing’ or choosing the right time to invest or divest is definitely key in your success.
Because of the fluctuations in any investment or business, a long-term growth outlook is important because there is time to make adjustments when necessary. The more time allowed makes the investment more reliable and provides for a chance to lessen risks. More importantly, time stabilizes earnings by narrowing the risk or volatility band of the business. Actually, looking long-term helps you adjust your operations to make up for any short or medium term negativedevelopments. This is one reason why a business should be properly capitalized with enough working capital for a long-term outlook. This is also why long-term investment options yield higher returns and have risk mitigating options.
According to Dr. Albert Einstein, “Compound interest is man’s greatest invention.” Great wealth can be created if you allow the power of compound interest and time to work for you. You see this power every day around us. Investments allowed to compound can help you beat inflation.
Compounding is a term usually for interest income received from bank deposits or interest paid on bank loans. Compounding only means that the interest amount is not withdrawn and more interest is computed on the interest amount and interest is again added to the new interest amount and this goes on and on until the total interest is withdrawn or paid.
This compounding phenomenon is not usually referred to in a business but actually, your business naturally ‘compounds’ whatever earnings or unfortunately, also losses you gain or incur. Thoughout the lifetime of your business, you declare dividends to take out your earnings or close the company to stop your losses. When your company is making money, it is always best to keep your earnings to grow the business further assuming you see good prospects in the long-term.
However, you need to analyze if the money kept in the business is really needed or is just lying idle. In such case, your company itself can find investment options outside company operations (for example, diversification or investments in financial assets like bonds). In this way, your company can still have the capital available for any future project. Or alternatively, you can withdraw the money as dividends (this will however be subject to 10% final withholding tax) and invest it yourself.
Leverage for a business is simply borrowing for operations and this is Good Debt. Good Debt allows you to lessen the capital you need for your business and still get the maximum income possible. It goes without saying that when you borrow for your business, you should have a complete study and analysis of your business plans and programs to mitigate risks. In fact, if you borrow from a financial institution, you will be required to present these plans and in most cases you may be asked for a collateral before you can get a loan. Hopefully, the required collateral is already built-in your business assets.
About the columnist
Francisco J. Colayco is an entrepreneur, a venture developer and financial coach. He is the Chairman of the Colayco Foundation for Education and the Author of the Bestsellers: Wealth Within Your Reach (2004 Book of the Year for Business and Economics Awardee), Making Your Money Work (Nominated for 2005 Book of the Year for Business and Economics), and Pera Palaguin Workbook. Together with the Colayco Foundation team, he gives talks, seminars, and workshops all over the Philippines and even reaches out to OFW Communities all over the world. Learn more about his advocacy to Build One Wealthy Nation at www.colaycofoundation.com or email email@example.com. To practice the investment principles he has been advocating in his publications and talks through the past 10 years, follow the Kapatiran sa Kasaganaan Service and Multi-Purpose Cooperative (www.kskcoop.com), an organization that provides its members with legitimate business options for different investment amounts.