When investing my money, I am always amazed at how complicated the procedures are. The unnecessary barriers that exist in investing capital can be seen as quite serious impediments. One of the biggest barriers is the broker commissions or the deposit size when considering real estate.

I am certain everybody with half an interest would be delighted to begin investing capital for long term rewards. Everyone loves the idea that they are going somewhere as time passes and investment brings that settling feeling. Knowing that your capital is working for you can be a real delight.

However the barriers to investment makes only the people with a large capital account able to invest. There are easier ways. First thing is we need to recognize that people earn a living from investment vehicles. That means there are costs. So for people with a very small seed capital account, investing in mediums where others make a living (like brokers, financial advisors and real estate agents) is quite the wrong direction.

These industries provide a certain legitimacy to the investment vehicles of the stock market or real estate, however, that legitimacy is seen wrongfully as security and a absence of risk. Nothing could be further from the truth. The truth is they are paid essentially to break us the bad news that investing can be risky. Not the other way around.

If we ignore the legitimacy of these institutional investment vehicles and look at the word investment without being baffled by the specialist language, we see investment is nothing more than spending money to get a return while making sure the risk is very low of losing the money. That is all an investment is.

If you want to invest, but only have a few hundred dollars, you will not make much of a return putting that money to work in a bank. At 6% per year you might make a few dollars. Not very exciting. However, link back to what investing means. It means buying something to re sell it later for a profit. The speed of your return is crucial. If you can buy something and sell it in a week, for a 10% or 20% return, well that is a huge accomplishment. If you have $200 and you buy something and re sell it for $230, that is a 15% return. This type of hands on investment is safer than the stock market precisely because you are in control of the money and making the decisions for yourself. You become your own investor source.

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It may seem daunting, the investment world, if you can say anything about it, would be that there is a lot of choice. Most of these options are pre-packaged solutions that the marketing departments of these financial organizations, has determined is what the market wants.

There are entry costs to any investment and this often severely erodes returns, that is if a return is achieved. The goal of any investor is to compound their capital every year at the highest possible compounder. The reason for this is simply that interest upon interest grows money exponentially. The higher the compounder, the more mathematically skewed that return is.

The other objective a professional investor has is to reduce risk. This can seem like a very vague thing to many people. Reduce risk? What risk? How do I reduce it?

Something all investors recognize, this is a fundamental truth. To invest, you need to part with money. The funds need to leave your account. You give the money to another and there is always risk associated with that. The only exception to this rule is the humble bank deposit. A bank is a special type of corporate entity that is guaranteed by the government. This type of investment is very safe, however it is also very low yielding. 6% per year is nothing to get excited about.

But lets think about that for a second. If we have two objectives, to compound our money as highly as possible every year and to reduce risk. The second objective, to reduce risk, needs to be addressed. If you part with investment money and give it to someone else, without insuring what you received for your money has tangible intrinsic value, then you are risking money and the risk is out of your control.

I hope this made sense. When you get a letter acknowledging that you gave so and so company $5000 what have you received for your $5000? Just a letter, telling you what you already know. That you invested your cash with them. There is no tangible intrinsic value in that letter unless it has extensive gold leaf all over the letter to the value of $5000

Your money has left your hands and is in the hands of another. You exchanged your cash for nothing of worth and therefore, you relinquished all control of those funds. The ideal risk neutralization is to get something of worth in exchange for your money. Then, you still have your capital in the form of a different value.

Lets consider how this can be accomplished. If you had a very small seed capital account, Say you had only $100 to start your investment activities. OK well what can you buy to re-sell with $100? A mountain bike? A TV or a CD system? The point of investing is to get a return. Thats all. How you get that return is completely up to you. If you spent $100 on a TV this week, that you ascertained before buying it, that it was actually worth $180 and you sold that TV within just one week, for lets say $140 to get a quick sale. You would have made a 40% return within a week. An astonishing level of compounding if you can keep it up each week. (which would be easy)

The point of the above example illustrates what I mean about reducing risk. If you found an investment object with an intrinsic value, above what you paid for it in real cash, you have fully and completely eliminated risk. The money has left your account, but you have a real and tangible good, that you exchanged the investment capital for. This is the perfect investment.

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Growth stocks outperformed value in 2007. Did the Exchange Traded Funds based on newer, proprietary index methodologies produce better results for growth stock investors during the volatile, last half of the year than their traditional peers, Russell and MSCI Barra?

Two providers of the new proprietary index methodologies are Powershares Capital Management and Morningstar. Did their growth funds produce better results? Looking at four large cap and four small cap growth funds in both index categories, the results are mixed.

I’ve compared fund performance based on three short time frames: July 2 to year-end (six months); October 9 (the market high) to year end; November 26 (the market low) to year-end.

The funds based on a proprietary index are, from PowerShares:

PWT – PowerShares Small Cap Growth

PWB – PowerShares Large Cap Growth

These funds are based on the Dynamic Intellidex index, which according to PowerShares applies “a rigorous 10-factor style-isolation process to objectively segregate companies into their appropriate investment style and size universe. Next, each company is thoroughly evaluated to determine its investment merit by analyzing numerous unique financial characteristics from four broad financial perspectives: fundamental, valuation, timeliness and risk.” That sounds an awfully lot like an actively managed fund.

From iShares, based on Morningstar index methodology:

JKK – Morningstar Small Cap Growth

JKE – Morningstar Large Cap Growth

Morningstar is less descriptive. Their funds are managed by Barclays Global Fund Advisors (iShares.com) and the fund literature simply states that stocks are selected based on “above-average ‘growth’ characteristics as determined by Morningstar’s proprietary index methodology.” Still, “above average” would seem to imply that some companies that might be included in an index based solely on market capitalization and broadly defined growth characteristics would be left out. And that should, theoretically, improve returns.

The traditional index ETFs based on indexes from established index providers are:

From Russell Investments, which has provided index methodologies for over 25 years:

IWO – Russell 2000 Growth (small companies)

IWF – Russell 1000 Growth ( large companies – also sold through iShares)

From MSCI Barra, which calculates over 100,000 equity, REIT and hedge fund indexes daily:

VBK – Vanguard Small Cap Growth

VUG – Vanguard Growth

For the last six months of the year, the best performing of all these funds was the PowerShares large cap fund (PWB at +4.14%) followed by the Vanguard large growth fund (VUG at +3.08%). One is based on an active, proprietary index, the other on a traditional index.

Ironically, the worst performing of the funds, over the same time frame, was also a proprietary index fund — the PowerShares small cap fund (PWT, -6.63%) while the best performing of the small cap growth funds was also proprietary — Morningstar’s JKK which came in at -0.94% for the last six months of the year.

The small cap growth funds based on the Russell and MSCI indexes had very similar performance to each other. IWO’s return was -4.15% for the last six months, -7.68% from the high and +4.82% from the low and VBK’s performance was -4.29%, -7.50% and +4.63% respectively.

For the last six months of the year, large growth outperformed small growth, but the spread among the fund families was quite wide:

PWB outperformed PWT by 10.77%

VUG outperformed VBK by 7.37%

IWF outperformed IWO by 5.64%

JKE outperformed JKK by 3.39%

Although all the funds are in negative territory from the market high of October 9, all the large cap funds have continued to outperform their small cap brethren on a relative return basis. But since the market low on November 26, something different has happened.

PWB has outperformed PWT by only 1.68%

VUG is dead even with VBK

IWF has underperformed IWO by 1.36%

JKE has underperformed JKK by 1.63%

Since large cap funds typically outperform at the end of a bull market, the six month returns aren’t unexpected. But the short-term performance, since the market low on November 26, seems out of character. Could it possibly mean that the market has already discounted the coming recession, and that small growth companies are poised to move ahead? Or is it simply a sign of just how oversold the small caps were and how speculative market participants have become at this stage of the game?

One measure of speculative enthusiasm is the relative strength of the Nasdaq Composite index (COMPQ), covering more than 3,000 companies, compared to the Nasdaq 100 (NDX), the 100 largest companies in the composite. Looking at the two indexes over the same three short-term time periods we see similar results, indicating that from November 26 to year end, investors were willing to speculate:

NDX outperformed COMPQ by 5.93% over the last six months

NDX outperformed COMPQ by 1.44% from the market high

NDX was only 42 basis points ahead of COMPQ from the market low.

Return calculations courtesy of StockCharts.com. Returns are net of fees and exclude re-invested dividends.

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Investing need not be a complicated process. Sometimes we get caught up in the language and hype of investing which makes us lose sight of what investing really is. Finding the right investment vehicle for your seed capital size is a good start, but what is investment?

If we strip it down to the bare essentials, an investment is simply spending money on something that gives a return. In other words, you buy something not for pleasure, but to make an income. It need not be about P/E ratios and investment formulas.

Often simplifying things gives a new perspective, that is why, in this article I explore some alternative investment ideas that are quite unorthodox. But the truth is, they are still investments because they are defined this way because you get a return.

By far the largest majority of people who are not professional investors have small seed capital accounts. Having as little as a few hundred dollars can be a real barrier in the traditional investment vehicles like stock markets.

The aim for most people in this boat is to make some easy daily cash. Cash flow is important in any business and it is fine to collect 20% for the next 40 years and expect to be rich at the end of that time frame. But what about now?

If you could make a 20% return every week buying and selling common goods, that would be an incredible feat. A bank might give you 6% for the whole year. But this is not so difficult. If you had $100 can you think of ways to invest that hundred dollars and turn it into $120?

It doesn’t sound too hard and Im sure you would have some ideas, but the percentage in that short time frame is remarkable. That is a 20% return in a week! You could compound it into a million dollars in under 40 such transactions.

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Making the decision to start saving money for investment can be a liberating experience and you are among the top 5% of individuals as soon as you make that decision and take the concrete steps necessary to begin investing.

Sure, there are a lot of people with super funds, but this is not pure investment. Packaged financial instruments are generally quite diluted in their returns and it takes many many years to see a reasonable return for the wait.

I am talking about active and wise investment. The type of activities that makes people very wealthy quickly. This type of investment is what most people fail to recognize. Most average people never think about saving for investment because it is hard. When you successfully do something that is hard, you become one of the few that can. The air up there is fresher and the view and perspective is clearer.

The difficult things in life are the desirable things. Most people do not have enough to make the next power bill because they spend most of their income entertaining or going to clubs or what have you. The thought of taking that surplus $100 and putting it somewhere safe instead of blowing it on a good night out can be a difficult decision. Doing so will put you in a position to pounce on an opportunity when it comes along.

The reason why I am so confident that opportunities will come your way is because having surplus capital and allocating it for investment is a rare thing. That being the case, there is a plethora of genuine and quality opportunities floating around because of this lack of competition. The ones that know this and have the funds and learn how to assess an opportunity for its risk VS reward benefits can easily become quite wealthy in a short amount of time.

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