What is an investment?
An investment is a long-term investment of cash or capital to acquire financial instruments or other assets. Investment is related to saving and is different from consumption. It is about making money work for us. When we buy goods or use services, it is not an investment.
The good investor
A good investor follows a few simple steps before taking action. First of all, he must understand the business in which he will invest, be competent in its sphere of action. Or to put it more simply: if you're into cars, don't put your money into the movie industry.
In addition, the business must have a consistent history and look secure in the future. If the company is not new to the market, it has certainly experienced different phases and overcome the competition. This shows stability over time. And here it is not a question of the company being a leader or having no problems. A good investor will be interested in how problems have been overcome.
A reliable company will also show consistency over time in producing output. Here, however, we should ask ourselves to what extent these "permanent" products have a future. Famous American investor Warren Buffett says that consumer goods businesses have low returns. If the product is practically indistinguishable from that of competitors, then it is not worth the investment.
Broke or poor - the difference is big
Good governance
An important detail about the company we are going to invest in is what kind of management it has. The success of a company depends on its managers. If they treat her as their own, then they are following the main goal. And it is to increase the value of the shares, not their number. A good manager knows how to distribute the profit, because it is this distribution that determines the value of the shares. There are two possible solutions here. If the company is in a development phase, then it is good to reinvest the capital. However, if the company is in a sunset phase, it is better to distribute it among the shareholders.
And we come to the purely human qualities of a good manager. He is the one who demonstrates his good decisions, but also admits his failures and is ready to discuss them publicly. It is a demonstration of readiness for change, of loyalty and honesty. However, the fact is that most managers, for fear of looking stupid, instead of openly admitting their mistakes, they blindly follow others in the industry and often make subsequent wrong decisions. Good management is a comparative guarantee of a successful investment.
The profit
A company's annual performance is measured by the ratio of earnings from operations to shareholders' equity. A good business is one that manages to get a return on capital without going into debt. As for the profit of the owners, it should also be measured on the basis of cash flow, which is defined as follows: net income after deduction of taxes plus depreciation, amortization and other non-cash receivables. To the cash flow we need to add another factor: how much of the profit should be used for recharge (improvements, new machines, etc.).
Profit margin
Profit margins refer to prices. Some companies manage to keep prices high. This means they can increase their spending further. Other companies that keep prices low try to reduce costs so that the cost of production does not increase. The second option speaks of a more stable company for investment. To reduce costs, it is sometimes sufficient to reduce administrative staff, for example.
12 стъпки за начинаещия предприемач
Risk, cost and return on investment
How much is an investment worth? It is equal to the amount of time for which the capital is invested. And the amount of uncertainty about the final outcome determines the risk. The third dimension - return is expressed in how much money this investment brings. In the case of short-term investments, all three indicators have p o-small values. I.e. the price is low, the return is low, but the risk is also low. With investments for a longer period, it is the opposite. There, both the price and the return are high. There remains the risk, which is also increased because we do not know for sure when this investment will be paid back to us.
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Basic principles in investing-1
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