The Cat & the Banker
How to Get Started with Investing: An Illustrated Story
by Nadir Mehadji
“Money makes us feel safe, doesn’t it? It is tempting to keep it in a stash close to us. You know, hidden in a cardboard box, or in a ball of wool, or in a bank account. But if we don’t invest our money, it tends to lose value over time.”
“There is a word to describe the phenomenon of prices rising. It is called inflation. And just as inflation measures how fast prices are going up, inflation also measures the pace at which the value of your money depreciates.”
Inflation may be silent. But its impact is real. Holding onto money in times of inflation is not a good idea.
A return is the gain or the loss that we make over a particular period of time, as a percentage of the money we invested initially.
“An asset is something that you own and has value. It is just another name for an investment.
- Stocks:
Stocks are a share of ownership in a company. Stocks give an investor the right to receive a share of the profits that a company makes. The share of profits that a company pays to an investor is called a dividend. Stocks are also known as shares or equity. - Bonds:
Bonds are loans. They regularly pay an investor fixed amounts of money called coupons according to a pre-defined schedule.
There are two broad categories of bonds: government bonds, when an investor lends to a country, and corporate bonds, when an investor lends to a company. - Real estate:
Real estate includes land and buildings. Real estate pays investors rent. Real estate is also known as property. - Currencies:
A currency is the money that a particular country issues. Different countries have different currencies. The national currency of Catland is the catdollar, while Dogland, the neighbouring country, uses the doglar. - Commodities:
Commodities are raw materials, such as agricultural products, metals or energy, which are consumed or used in manufacturing. - Alternative stores of value:
Alternative stores of value are valuable objects, such as fine art, antiques, jewels, collectibles, or precious metals like gold.”
“When money can earn a return, time is your friend, because returns work for you in an interesting way.”
Catsby grabbed a notepad on the table and drew two lines. One curved and rising, the other one straight.
He pointed at the curved and rising line: “If you do the right thing, the returns that you earn on money over time will not grow in a straight line. Instead they will accelerate and snowball. We normally use the word ‘compound’, but snowball is also a good word.”
“How long would it take me to double my C$100,000 if I reinvested returns every year?” Socrates asked.
“It’s simple. Let me give you a trick. The magic number is 69.
Say you made 2% annual returns and you reinvested your returns, to calculate how fast you could make C$100,000 become C$200,000, you would simply divide the magic number 69 by 2, the return.”
Shares are titles of ownership which prove that investors own a stake in the company. That’s why owners of a business are also called shareholders.”
A number of terms are used interchangeably. Just remember that ‘equity’ means the same as ‘shares’ and ‘stocks’, and that both ‘loans’ and ‘bonds’ are forms of debt.”
A company might be able to ride an expanding sector of the economy, or benefit from an overall expanding economy. So when the whole economy grows, a well-run company may see its profits lift like a boat on a rising tide.
So buying stocks is also an indirect way of gaining exposure to the ups and downs of the entire economy.”
“Which companies should I buy shares of?” Socrates asked.
“Companies with prospects of growing profits become more valuable over time. Conversely, stocks of companies whose profits keep deteriorating fall as time goes.
Identifying the first kind of companies requires homework. But when an investor buys a stock, he buys into a business. He needs to understand how the business makes money and how it plans to grow.
Stocks whose earnings are expected to grow at a high rate are better for capital appreciation. They are known as growth stocks.
Stocks of companies that enjoy steady business and generate stable profits are better for income, as those companies are able to pay investors regular dividends. They are called income stocks.
An investment is liquid when you can sell it at short notice without having to concede a large discount to the next buyer.
Typically, houses are illiquid investments. They take time to sell, unless sellers offer a heavy rebate. And in the case of stocks, private stocks are significantly less liquid than the stocks of public companies.”
You could diversify within one asset class. For instance, you could buy shares of companies from different sectors of the economy: some Fat Fish shares in the food sector and some Cat & Pillar shares in the construction sector.
You could also diversify across various asset classes. You could for example buy stocks, bonds and property. Investments in different asset classes are by definition less correlated than investments within the same asset class.
You could also diversify geographically. You could make some investments in Catland and others in Dogland.
What Is Scale In?
Scale in is a trading strategy that involves buying shares as the price decreases. To scale in (or scaling in) means to set a target price and then invest in volumes as the stock falls below that price. This buying continues until the price stops falling or the intended trade size is reached.
Scaling in will, ideally, lower the average purchase price, as the trader is paying less each time the price drops. If the stock does not come back to the target price, however, the investor ends up purchasing a losing stock.
From https://www.investopedia.com/terms/s/scale-in.asp
• Short selling occurs when an investor borrows a security and sells it on the open market, planning to buy it back later for less money.
• Short sellers bet on, and profit from, a drop in a security’s price.
• Short selling has a high risk/reward ratio: It can offer big profits, but losses can mount quickly and infinitely.
From https://www.investopedia.com/terms/s/shortselling.asp#what-is-short-selling
Scaling in means investing little by little over a period of time to reduce the risk of poorly timing your purchases.
The benefit of scaling in is that you average your purchase price. It reduces your downside risk.
Bonds belong to a category of investments that financiers call ‘fixed income’. Investments in that category pay fixed amounts of money to investors according to a fixed schedule. As a result, investing in fixed-income products, and bonds specifically, is a great way of earning predictable future income.
Initially Fat Fish borrowed money from banks through loans. However, Fat Fish turned so successful and grew so large that even banks could no longer lend them the kind of money that they needed to keep on developing their operations.
So banks offered Fat Fish to help them raise a different kind of debt.
They helped Fat Fish issue bonds.
If you remember, bonds are loans which are sliced into small pieces. So, when an investor purchases a bond, he simply owns a fraction of a bigger loan.
What Are the Different Types of Tax Receipts?
In its most basic sense, a tax receipt is any record or documentation that tax has been paid. There are many different kinds of tax receipts. The most common are sales tax receipts, which indicate how much sales tax a person has paid in a given transaction. All business taxes, income taxes, and sales and use taxes also generate receipts.
Most of the time, the purpose of a tax receipt is to prove that tax has been paid, so as to avoid double taxation or non-payment penalties. A tax receipt essentially serves as documentation that can be presented to taxation or customs authorities as evidence of tax law compliance. In some settings, tax receipts can be used for reimbursement or refund, as well.
Travelers can often seek reimbursement from sales or value-added tax (VAT) paid abroad by saving their receipts and presenting them to the appropriate customs officials. Most of the time, sales tax and VAT are designed to apply only to residents. Foreigners who make purchases abroad that are subject to these taxes can often seek reimbursement by saving their tax receipts. This kind of reimbursement typically only works across borders. Differences in U.S. states’ sales tax rates cannot usually be equalized with reimbursement.
Receipts can also be used to claim refunds on self-prepared tax returns. The United States has one of the most robust self-filing tax systems in the world. U.S. tax law basically assumes that all citizens are subject to the maximum amount of tax, but then invites individuals to claim deductions in order to lower their overall obligation. Receipts are required to substantiate the vast majority of deductions.
Any claimed business expense, for instance, must usually be corroborated with an original sales receipt. Charitable donations claimed as deductions, too, often require a detailed receipt identifying the donation and its estimated value. These receipts are not tax receipts that demonstrate tax paid, like a business tax receipt or an income tax receipt. Rather, they are receipts used for tax purposes. This is a different sort of tax receipt.
A tax receipt can also be an accounting from a tax collector back to an individual tax payer. This sort of use is rare, but was made popular by the United States’ 2011 “Federal Taxpayer Receipt Program.” The program, which is online, purports to reveal to each taxpayer the specific causes and budget funds to which tax dollars were funneled over the past year. The federal receipt is essentially a sales receipt presented to citizens indicating what exactly was purchased with money remitted in taxes.
From https://www.wise-geek.com/what-are-the-different-types-of-tax-receipts.htm
Bonds which countries issue are called government bonds, while bonds which companies issue are called corporate bonds. The names are different, but both work much the same way.
low-margin
adjective
producing a low level of profit:
Paper manufacture is, generally speaking, a low-margin business.
The company has shifted away from low-margin products.
From https://dictionary.cambridge.org/dictionary/english/low-margin
Coupon
The interest paid on a bond. That is, the coupon is the amount that the issuer must pay to the holder of each bond in exchange for investing in that bond. Coupons usually are paid every six months. They are called coupons because formerly they were represented by physical coupons on the bond certificate that had to be clipped and returned to the issuer to receive the interest payment. With the advent of computers, this has become much less common.
From https://financial-dictionary.thefreedictionary.com/coupon
Redemption
In bonds, the act of an issuer repurchasing a bond at or before maturity. Redemption is made at the face value of the bond unless it occurs before maturity, in which case the bond is bought back at a premium to compensate for lost interest. The issuer has the right to redeem the bond at any time, although the earlier the redemption take place, the higher the premium usually is. This provides an incentive for companies to do this as rarely as possible.
From https://financial-dictionary.thefreedictionary.com/Redemption
bonds have distinct characteristics:
– a redemption value, which is also called the principal of the bond. This is the amount of money that the borrower promises to repay the investor at the end.
– a maturity date, which is the date when the principal will be paid to the lender.
– a coupon, which is the interest rate that the bond will pay regularly to the lender, as a percentage of the principal.
– a coupon schedule, which spells out the dates at which interest payments will be made to the bondholder.”
principal
1. The face amount of a bond. Once a bond has been issued, it may sell at more or less than its principal amount, depending upon changes in interest rates and the riskiness of the security. At maturity, however, the bond will be redeemed for its principal amount. Also called principal amount.
From https://financial-dictionary.thefreedictionary.com/principal
“What is true is that when a company like Fat Fish issues both stocks and bonds, the bonds that the company issues are safer than its stocks.
The law protects bondholders more than shareholders: if Fat Fish ran out of cash, bankruptcy laws would make sure that lenders get paid before shareholders with whatever money the company has left.”
“So lenders carry less financial risk than shareholders?”
“That’s right. What is also true is that the bonds which governments issue are generally safer investments than the bonds which companies issue in the same currency.
Defaulting means stopping to pay.
出清
出清意味着供求均衡。如果市场没有出清，那么一定存在着短缺或者过剩。经济学术语：当价格确实能使需求等于供给，以至于任何人可以在那个价格上买到他所要买的东西，或者卖掉他所要卖的东西。这时的市场就是出清的。
短缺意味着在现行价格下，人们想要买某些东西却买不到，这是与为了一张火车票而排长队这样的经历相联系的；过剩则恰恰相反，当今商品房的广告满天飞，但鲜有人问津，这就是对过剩的最好诠释。
From https://baike.baidu.com/item/出清
“You see, every bond has a price. And the price of a bond is expressed as a percentage of its redemption value, the amount of money that the borrower promises to pay back at maturity.
For instance, the 5-year-maturity bond that Catland issued last month promises to pay back C$100 after 5 years: C$100 is its redemption value. But C$100 is not always what a buyer would pay for the bond. The price will be determined by the market.”
The yield of a bond is the annual return that the bond promises to pay if the bondholder keeps the bond until maturity.
If you had bought the 5-year Catland bond at C$100 on the day it was issued, your yield would be 3.5%, the coupon rate. That’s the annual return that you would get for owning the bond.
The reason why financiers prefer to talk in terms of yield rather than prices is because comparing the prices of two bonds is not straightforward. Every bond has slightly different features: different borrowers, different maturities, different coupons.
But yields make for an easy comparison between bonds. At a glance, anyone can compare how much various bonds promise to return. For the bonds we mentioned: it was 3.5% and 4% for Catland bonds against 6% for Fat Fish and 9% for Skinny Fish when they were first issued. Simple. Yields are a common feature across bonds. So comparing bond yields instead of bond prices is closer to comparing apples with apples.”
“And you would agree with me that the price of the 3.5% bond would need to adjust enough to make investors indifferent between buying the old 3.5%-coupon bond at a new lower price or the new 4% bond at $100.”
“Makes sense.”
“That’s why bond prices fluctuate and a bond offers a predictable return only if an investor holds the bond to its maturity. In between the date of purchase and maturity, market conditions will affect the price.”
“How about if a bond investor had to sell for unforeseen circumstances? Could he prepare for that?”
“A bond investor would need to be aware of something called the ‘duration’ of the bond he targets before he invests. Duration is an important property of bonds and a key risk measure for the prospective investor. Every bond has a specific duration.”
Duration is a calculated number which gives an approximation of how many cents the price of a bond would drop or rise, every time the yield of a bond changes by as little as a percent of a percent (0.01%).”
A property of bonds is that longer bonds have longer durations: they are more sensitive to fluctuations in yields.
But it is not always a bad thing. The higher the duration of a bond, the faster the price of a bond rises when interest rates are falling. So a large duration makes a bondholder richer when interest rates drop.
But the higher the duration of a bond, the faster the price of a bond falls when interest rates go up. So a large duration hurts bondholders when yields rise.
Keep in mind that bond prices and interest rates move in opposite directions.
To default means to fail to pay.
The probability that a borrower may default on their obligation to repay a debt is called the credit risk.
Beside ratings, another way to assess credit risk is to look at how much a bond promises to pay on top of the return of a government bond with a similar maturity in the same currency. That difference is called the credit spread. It reflects the probability of default of the issuer.
For Fat Fish, the difference was 2.5% compared to Catland. For Skinny Fish, 5.5%. The higher the difference, the riskier the borrower. If a bond issuer could afford to pay lower interest rates, they would happily do so.
The rental yield of a property is the ratio of the annual income from rent over the value of the property.
When an investment makes money, leverage magnifies the profits. But, when an investment loses money, the loss becomes much greater than it would have been without leverage.
Debt is potent. It is not free money. If you intend use it, use it with caution.
The distinction between good debt and bad debt is subtle because the problem is not with the debt itself. Debt is just a tool. It’s how you use it.
“When you have debt, inflation is on your side. When you take on a fixed-rate mortgage, it is like issuing a bond yourself and promising to pay fixed coupons to the bank. In times of rising inflation, the value of the fixed coupons that you will pay to the bank, and even the value of the principal that you will return in the end diminishes over time, simply because the value of money depreciates.
So times of accelerating inflation favour borrowers who have taken a fixed-rate loan.”
mortgage
[ˈmôrɡij]
NOUN
- a legal agreement by which a bank or other creditor lends money at interest in exchange for taking title of the debtor’s property, with the condition that the conveyance of title becomes void upon the payment of the debt.
From https://cn.bing.com/search?q=mortage define&cvid=9f8f23524852455e9be6d3040391488b&form=WSBBST
denominate
[dɪˈnɒmɪneɪt]
动词
2. (be denominated)
(of sums of money) be expressed in a specified monetary unit.
“the borrowings were denominated in US dollars”
From https://cn.bing.com/AS/API/WindowsCortanaPane/V2/Init
Another attractive feature of alternative stores of value such as fine art, collectibles, antiques and precious metals is that they have no counterparty risk, if you hold them yourself.”
“What is counterparty risk?”
“When we buy stocks, or bonds, or simply when we have money at the bank… there is a chance, however slight, that the company or the government or the bank with which we have the contract might decline or fail to pay us what they owe. That is counterparty risk.
However, assets that we can hold ourselves do not have that problem. If you ever need them, you won’t need to stand in line at the bank for them.”
Some of these products are called derivatives. They are financial products which derive their value from the value of other financial products.
Structured products can be a way for banks to recycle derivative positions that they no longer want to hold, but do not manage to sell either. Structured products are a bit like fish balls. For the consumer, it is not quite clear what ingredients are in it. The consumer might get quality fish if he’s lucky. But he might also get second-rate tails and bones that didn’t sell the previous day.
A fund is simply a basket of various investments, which is managed by a professional money manager.
Investing in a fund is effectively hiring someone to manage a sum of money for you.
“In an actively managed fund, the fund manager selects investments and adjusts his selection over time according to his best judgment and within the limits prescribed by the mandate of the fund.
This way, the fund manager strives to generate a better performance than the average return of the market in which the fund invests. This is also why you would pay them higher fees: you would expect active managers to add insight and value.”
In an indexed fund however, the fund manager has no discretion over the selection of investments within the portfolio.
Index funds are also called tracker funds. A tracker fund aims to replicate the performance of a particular market.
Finding an outstanding portfolio manager is no easy task. So, if you were to decide to go down the route of investing money through actively managed funds, you should be careful how you select the fund manager.
appreciation
[əpriːʃɪˈeɪʃ(ə)nəpriːsɪˈeɪʃ(ə)n]
名词
- increase in monetary value.
“the appreciation of the dollar against the pound”
同义词：
increase·gain·growth·rise·
[更多]
From https://cn.bing.com/AS/API/WindowsCortanaPane/V2/Init
The central bank influences economic growth and inflation by stimulating or cooling down demand. And the main tool that the central bank uses to influence the level of demand is tweaking the cost of borrowing money. They make borrowing more or less expensive.
Controlling your expenses and spending less is sometimes more effective than trying to earn more.
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