If you have some extra money either because of careful savings or from an inheritance, you may be thinking about how you can make the money earn an income. You may be considering investing in a good start-up or other excellent business with the hope that it will become another billion dollar company. There are some traits you should look for in a business before you put your money there, and following the advice of financial veterans like Richard Schaden can help to give you the information needed to make these important decisions.
Value investing is buying stocks, bonds, mutual funds and other assets that are selling for much less that you determine they are really worth. To make this work, you must sell the investment when it reaches intrinsic value. The only reason not to sell at that time is if it is an excellent business that has potential for long-term high rate of return.
Durable Competitive Advantage
A durable competitive advantage is something a business has the other companies can’t reproduce. Companies like Coca-Cola offer products that are recognized all over the world. When you want to invest in a company, look for durable competitive advantages that won’t be compromised by outsourcing, attacks from competitors and other market forces such as globalization.
Look for a company that can reproduce their products or services very fast. These companies make it easy for franchises to open and be successful because their product is basically the same in Hong Kong or Seattle. Examples of this type of business are Microsoft, McDonald’s, Coca-Cola and Pepsi.
You may have found a company with brilliant management and excellent financials but this is not enough to ensure a good return on your investment. Even though these things are essential, the price you pay for your asset will determine how much you earn. This means you shouldn’t pay high prices for stock even in excellent businesses such as Microsoft or Gillette. If you can get a fair price, then they are good investments, but these companies often have inflated stock prices that will not give you a good return. You need to do research or get a good financial advisor.
How to Know?
When you research a business to see if it is worth investing your money, you need to look at its financial statements. Every business needs to spend, or invest, money to make money. This is its return on invested capital. If one company spends $50 for a return of $5 and another company spends $50 for a return of $25, the second company will generate more cash. There are exceptions to this rule. If a good company that has a small return on investment and is selling stock for a fraction of its intrinsic value, there is a good chance it will weather any financial storms and its share prices will dramatically go up. For this, you may need to have patience and wait for three to five years.
The bottom line on investing in existing businesses is knowledge. If you’re new to investing, you may need the help of someone who has the knowledge. Your first step will be to research financial advisors until you find someone who can explain everything you need to know in simple language. Once you have an idea about what’s going on, you can use your own judgment for investing your money.
This post was contributed by Derick Saunders