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When investing, always calculate in percentage terms

Friday 11 December 2015

Young people in early training for this profession are particularly close to my heart. It is not easy for them to find a way to invest money. It is not taught in school. However, here is a very simple suggestion: Do not think in euros, but in percentage terms.


Again and again I hear the argument: "I do not have enough money. It's worth it but not for me. For the few euros, which I could make from this .... "Well, I know what I am talking about. As a young man I was in the same situation. But I tried it, and learned that it was worth my while to invest money in the stock market. Here is one example:

 

On December 8, 1971 exactly 44 years ago, I bought my first share. I was 15 years old and my savings amounted to DEM 200, - (about € 102, -). It was at a time when smart phones and the Internet did not exist. I wanted to do more with my money. So I studied the stock market in the newspaper and researched it as best as I could.

 

I chose shares of a mechanical engineering firm (hereinafter: referred to as GHH, later part of the MAN Group) Gutehoffnungshütte which looked promising to me. I placed the buy order using the pay-phone during my school break time. The share price was DEM 143.50. Because of the high minimum-fee the total cost for this trade was DEM 150.36. I had only expected to pay 1.5% in expenses for buying and selling the shares. At the minimum fee of DEM 7 - I had not thought it would cost nearly 5%.

 

What started out with great expectations, initially turned out to be a low blow. Because GHH's stock had to rise to at least DEM 14, - for me to break even on the trade. It was discouraging as I had prepared myself so well for this and yet miscalculated the transaction cost. But I was lucky. In just four months, on 11 April 1972 I could sell the GHH shares for DEM 179,- After deducting expenses I was left with DEM 172.05. I managed to earn a profit of DEM 21.69. A very small amount (EUR 11.06), for which most people would just shrug their shoulders. "And, this has really paid off for you....?"

 

But I looked at this quite differently, because I had achieved a remarkable success. A profit of 14.42% and that in just four months time! The small amount of money did not bother me. This was an eye opener. I learned it the hard way: If I manage to succeed in achieving an increase of 14.42% with a stock ,

then I could also achieve that with the same research and work with 1000 or more shares. And that's the beauty of the stock exchange. The amounts invested, ultimately really do not matter. The mechanism is always the same. Everything you learn with smaller amounts you can "apply" in real life later on, when more money is available. This will be helpful. The percentage calculation is the key.

 

So I was lucky enough to gain two early insights in my life:

 

  1. It's worthwhile to be successful in life, so you can regularly save money and build up reserves from your earnings in your job.
  1. Those savings become capital. And that capital can become the second pillar to generate income for you, if you invest it properly.

This has been a wonderful insight and motivated me. Not only in the professional work I chose to do, but during the course of my life that capital would also “work for me". And so it has come to pass.

 

So: Do not let other people discourage you with talk that "it does not pay". Try to save capital and then put it to work for you. In the beginning just calculate in percentage terms. Who knows, later on these investments can hopefully turn into enormous sums of money. Just be patient!