Long Term Investing
May 23rd 2008 10:59
The purpose of investing often gets people confused. Most people think of making a quick buck and exiting the market. Yet, investing could be seen differently.
There are at least two purposes to investing: (1) investing to make a gain and then converting it into currency to be used for some other extraneous purpose such as buying a new car, going on holidays or just throwing a big party; and (2) investing to increase one’s wealth on a permanent basis being that then the investment gains a long term view and is not, ultimately, to be converted to into a consumption good.
The first type of thinking is typical of the speculator but also of the investor who distrusts the market and is anxious to recover his invested money.
The first kind of investor, being concerned with converting his investment into currency, must account, if he is to make a gain, to paying Capital Gains Tax (CGT). CGT taxes you before you can spend your money.
The long term investor, instead, if he is happy with his investment which would be giving him a satisfactory rate of return, will do well keeping it for the long run. One of the reasons for this is that, if he sells, he not only will have to pay CGT, but also he will have to find a similarly returning investment to substitute.
Undeniably, a waste of money through having to pay CGT and a waste of time through having to find a replacement investment.
It should be noticed that the long-term investor benefits from dividends, if the company declares them; from reinvestment of dividends, if the company allows, saving the investor broker’s fees; from rights issue which also saves him broker’s fees while keeping his percentage ownership intact.
Moreover, if the company’s earnings increase, the investor benefits directly from them, if you consider that earnings belong to the shareholder.
The staying shareholder could also benefit from returns of capital and, obviously, he can delay at will that payment of CGT virtually forever.
All this is out of the scope of the short term speculator who, after spending his money returns to the same wealth level he had before he invested. A complete waste of time.
There are at least two purposes to investing: (1) investing to make a gain and then converting it into currency to be used for some other extraneous purpose such as buying a new car, going on holidays or just throwing a big party; and (2) investing to increase one’s wealth on a permanent basis being that then the investment gains a long term view and is not, ultimately, to be converted to into a consumption good.
The first type of thinking is typical of the speculator but also of the investor who distrusts the market and is anxious to recover his invested money.
The first kind of investor, being concerned with converting his investment into currency, must account, if he is to make a gain, to paying Capital Gains Tax (CGT). CGT taxes you before you can spend your money.
The long term investor, instead, if he is happy with his investment which would be giving him a satisfactory rate of return, will do well keeping it for the long run. One of the reasons for this is that, if he sells, he not only will have to pay CGT, but also he will have to find a similarly returning investment to substitute.
Undeniably, a waste of money through having to pay CGT and a waste of time through having to find a replacement investment.
It should be noticed that the long-term investor benefits from dividends, if the company declares them; from reinvestment of dividends, if the company allows, saving the investor broker’s fees; from rights issue which also saves him broker’s fees while keeping his percentage ownership intact.
Moreover, if the company’s earnings increase, the investor benefits directly from them, if you consider that earnings belong to the shareholder.
The staying shareholder could also benefit from returns of capital and, obviously, he can delay at will that payment of CGT virtually forever.
All this is out of the scope of the short term speculator who, after spending his money returns to the same wealth level he had before he invested. A complete waste of time.
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