Why Investing Is Like Choosing A Plant

Here’s an interesting question: When you invest, do you know if you are buying a seed or a tree adorned with pretty bouquets of flowers? If we invest in the same way that we might choose a plant, we might do very well in the future.

Allow me to elaborate.

Buying a seed

When we invest in a small, new and unproven company, it is akin to buying a seed of a plant. We can buy and plant it in the soil, but there is no guarantee that it will grow even if we water it. Thus, with this type of investment, we have to be aware that there is a risk of permanent loss to our invested capital and we may not want to allocate too much of our wealth into this type of investment.

Buying a tree

Buying established companies can be seen as buying a tree from a nursery.  The risk of it dying overnight is minimal. With proper management and care, the tree could grow for many years to come. However, some trees might still catch diseases along the way. So, we have to monitor them closely.

Buying bouquet of flowers

Investing in popular companies that the market loves during a period of time can be seen as buying a beautiful bouquet of flowers from the florist. We will most likely feel great after buying them. It will be beautiful and expensive but unfortunately, it has the tendency to wither and die in the near future.

As such, we may want to be careful when investing in popular companies, some might indeed become great investments but more often than not, investors can end up overpaying for them and suffer losses on their investment.

Putting it together

In theory, we should endeavour to fill our investment garden with many healthy and young growing trees. We can certainly look into buying a few seeds every now and then but we may not want to make it our main focus.

Lastly, we may want to avoid buying beautiful flowers (popular companies) as an investment. Popular companies often look great but are most likely not great for our long term wealth.

The Motley Fool's purpose is to help the world invest, better. Click here now for your FREE subscription to Take Stock - Singapore, The Motley Fool's free investing newsletter. Written by David Kuo, Take Stock - Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.

Like us on Facebook to keep up to date with our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own any companies mentioned above.