People who invest to make money are different from those who invest to build wealth. They think differently and approach investing differently.

This article discusses how they differ and gives some pointers on being a better investor.

Investor A: Investing to make money

When people invest to make money, the key question they ask is, “Can this investment make more money in the shortest amount of time?”

They assess the quality of an investment on two criteria:

1. The amount of capital gains: Take two stocks, A Bhd and B Bhd. Both were bought at RM1 per share by the same person. Subsequently, A Bhd is sold for RM2 apiece and B Bhd for RM3.

The buyer would say B Bhd is a better investment.

2. Duration of holding: Again, two stocks, C Bhd and D Bhd. Assume both were bought at RM1 per share and sold at RM2.

But, if the holding period for C Bhd was one month and D Bhd, one year, the buyer would say C Bhd was a better investment.

So, to this buyer, a good investment is about earning more money in less time.

This leads many into trading, speculating and even gambling their money on the stock or property markets to try to make money faster. These investors often ask for stock tips, read financial news or reports and get the best technical trading tools to help them to do this.

Who has the time to get educated and master the art of investing? Is this profitable and sustainable? Not for most.

Their decisions are often clouded by emotions such as fear and greed. When a stock is offered at a huge discount, many become fearful of it dropping further as the focus is on not losing money. So, they do not buy.

But, when a stock price rises, many become greedy as they believe it will rise even further in the near future. They buy and instead of “buy low, sell high”, they are buying high and selling low, resulting in losses.

This is why most people think investing is risky, not understanding that the issue often lies in the investor wanting money.

Investor B: Investing to build wealth

Having money does not necessarily mean having wealth. It depends on how wealth is measured. Is someone with RM1 million wealthier than another who has RM500,000?

If the answer is “yes”, a person’s wealth is being measured by their possessions. But it should be measured in time.

How long can someone finance their current lifestyle without actively working?

If the one who has RM1 million spends RM200,000 a year, their wealth is equivalent to five years’ worth of living expenses.

But if the person with RM500,000 spends RM50,000 a year, their wealth is 10 years’ worth of living expenses.

And what if the person with RM500,000 is also bringing in RM50,000 a year in passive income from investments? They are funding themselves with passive income, leaving the RM500,000 relatively untouched. In essence, they have achieved infinite wealth.

Wealth = Liquid assets / (Yearly expenses – annual passive income)

In this view, the person with RM500,000 is financially freer than the one with RM1 million as they do not work to support their lifestyle.

Instead of just making more money, investors who intend to build wealth focus on the investment itself. These investments are supposed to consistently bring in income, giving them the freedom to choose whether or not to keep on working or spend time doing the things they enjoy.

In that view, instead of fast capital gains, an investment is assessed based on three main criteria:

1. Stability: This is to ensure the investments can keep on making money rain or shine. It is a test of resilience and income predictability.

This is why investors would be reading up the financial statements of the company issuing a stock before investing.

2. Growth: Most investors would love to earn increments in their income from their investments in the long run. They would look at the main drivers of growth of the investments before committing to it.

3. Yield: Investors measure how much passive income their capital will earn. The higher the yield from an investment, the more appealing it is to them.

It is also a way to avoid buying into an investment at a high price. The calculation of yields (dividends or rent) ensures they do not overpay but fish for discounts for their investments.

This is very different from people who invest to make money and often end up buying high to sell low.

People who invest to build wealth focus on making income-producing investments at the lowest prices. This is less risky as they are not guessing where the price of an investment will go in the near term.

It could be said that people who invest to build wealth treasure time and freedom more than money itself. It is about achieving freedom by gaining time, a commodity more precious than cash.

In short, here are the differences between the two types of investor:

This article first appeared in kclau.com

Ian Tai is the founder of Bursaking.com.my, a platform that empowers retail investors to build wealth through ownership of fundamentally solid stocks. It is an essential tool that sifts out stocks that grow profits consistently from a database of over 900+ stocks listed mainly in Malaysia.