5 Guidelines for Successful Investing
In the many years of investing and learning from the school of hard knocks, I came to realize several basic principles to invest in a way that would make your mother proud. I want to provide you a draft of my understanding of successful investing. This can also be applied to fields other than the financial market.
1. Understand basic accounting
Build an interest in basic accounting so that you can read annual reports easily. In fact, they can be requested free of charge from any investor relations department of a publicly traded company. Order a few reports of companies you have an interest in and read them (especially the first half up until the financial statements section). Having this little bit of accounting foundation will be of great benefit to manage your own company, or understand the company you wish to invest in.
2. Move within your circle of competence
I know that my own circle of competence is rather limited, thus I only want to deal with two types of businesses which I can understand inside out: Companies which I have either created myself or companies which I wished I had created myself. You can buy shares of stock for the latter ones and piggy-back on their growth.
3. Gauge predictability and growth prospects
There has to be a degree of predictability to every investment opportunity with regards to future cash-flows. You also need to have certainty that the cash-flows have growth potential. If a positive income does not appear to be foreseeable in the near future, look elsewhere.
4. Ensure a generous return on investment
A return on investment has to make economic sense. If it is too marginal, you risk a loss for a given period if extrinsic conditions affect the company adversely. There needs to be playground for growth so that the company is not getting stifled by too tight budgets in the first place.
5. Keep your arsenal ready
Invest within your means. It is wise to retain some capital at all times to be ready for a new investment once an opportunity arises.
