Many companies make the mistake of focusing purely on generating profits and ignoring the important role of investment in building a strong and sustainable future. The wise responsible investment approach has always stressed that the purpose of investment should be to choose sustainable, profitable businesses that yield solid, long-term returns for investors over the medium to long-term term. However, a lack of disclosure has not been the only problem; an abiding faith in an almost limitless supply of inexpensive credit was also not the issue. For years, governments around the world have been advocating a return of state aid to the private sector. But the commercial finance industry is reluctant to acknowledge that its role in society and its contribution to economic strength cannot be overlooked.
The first purpose of investment then is to secure long-term viability of the business. As such decisions are made with an eye to profitability, prudent and pragmatic decisions are invariably made. Investments which are considered one-offs by investors are usually those where the anticipated returns are less than the cost of capital raised. This may not sound like a problem for other types of businesses but when one considers the sheer number of different business types and their potential for generating future profits, it becomes clear why careful consideration of long term viability needs to be given prime importance in commercial lending. While the purpose of investment may be to generate a substantial return, good investment decisions need to be based on solid foundations in future earnings as well as a sound strategy for acquiring and sustaining market share.
Secondly, the purpose of investment may be to create wealth. This is not a simple concept; many different concepts must be taken into account before wealth can realistically be measured. But an objective, practical evaluation of what a business will create over time shows that most businesses create significant long-term value. The purpose of investment then is not simply to generate profit. It is also to build a portfolio of assets that can generate returns that will eventually be used to fund the business’ growth, expansion and operations.
Perhaps the most common reason for purpose of investment is the desire to contribute to the economic development of a country. Many people are willing to contribute to the economic well being of a country for the purpose of improving the standards of living and therefore have an interest in putting their money into economic opportunities. These investments may be in terms of buying the products and services of a company or in buying raw materials that can be used for manufacturing processes. They may be directed towards equities in a mining operation or in creating a business or promoting a product. Whatever the purpose of investment, it is almost always directed towards creating a long term asset base for the future.
Another common purpose of investment is the avoidance of loss. For some investors, the purpose of investment may be to make money to avoid loss. This may take the form of making money by trading in the stock market, through bonds or mutual funds, for example. In cases where the purpose of investment is purely for the purpose of avoiding loss, the resulting value of such an action is termed a net asset base and is considered to be the underlying asset value of the portfolio.
A third common purpose of investment may be to provide financial security. Many people look forward to the day when they can use their accumulated savings or capital gains to provide them with a long term financial security. Examples of this purpose of investment might include the purchase of a home or a piece of commercial real estate, or the purchase of insurance on an individual’s life, such as health, life and disability. Other examples might be purchasing a car or some other large ticket item that provides long term security. Whatever the purpose of investment, the result of such investment activity is the creation of a long-run financial security.