Everyone knows that mostly all wealthy people have one thing in common... They all invest. We all want to be like the all time great Warren Buffet, who makes millions at a time investing in stocks; it sounds great and it looks fun! But when you're ready to start investing in the stock market is it okay to just put your money in and cross your fingers? The answer seems obvious, but it is incredible how many people do just that when they get started in the investment game. There are many factors that people like Warren Buffet consider when they invest in a stock... Why not use the same principles when we invest? Here are some things to consider when choosing which stock to invest in.
1) Is it a Commodity Based Company or a Monopoly?
You're driving your car down the street one Saturday afternoon, and your car needs some gas. You see two gas stations next to each other, and you pick Shell over Mobil. Why did you make this decision....? If I had to guess, I would say it was the price. There are many other examples than just gas, but the company you invest in CANNOT get it's competitive advantage from the price that they offer their customers. If company A lowers their price, company B will lower their price too. Sooner or later, both companies will be shrinking their profits and potentially run out of business! Let's look at Coca- Cola for a quick moment. You look at a coke bottle and sitting right next to it, there's an off brand soda that's selling for slightly less. Which product do you think the majority of customers are going to choose. Of course.... It's the Coke bottle! It doesn't matter what price Coke's competitors are going for; Coca- Cola is a monopoly, and customers are going to be drink Coke until the day they die. I can use the same example with Frito Lays, Pepsi, and so on and so forth. Next time you choose a stock, make sure it's a monopoly!
2) Does the Company Have to Spend a lot of Money to Reproduce Their Merchandise?
Warren Buffet not only likes to invest in Monopolies, he likes to invest in companies that don't have to spend a fortune to sell their product. When choosing a stock, does that company have to pay an astronomical amount of money to stay in business? Let's look at General Motors for example... General Motors has had a reputation over the last couple of decades to disappoint a lot of their investors (However they have made other investors a lot of money). But General Motors is a great company you say! Let's dive into why this might be the case... When business is not going well for GM (Let's say the market crashes), they may find themselves struggling to produce profits. When profits are low, they need to sell more product, and when they need to sell more product, they need to produce more product. Here's the problem.... When needing to produce product, profits can go down significantly if the economy is doing poorly and no one can afford to give GM business. As a result, profits go down, the company is not happy, and the investors are not happy. On the other hand, do you think Coca- Cola needs to spend a ton of money in order to sell their Coke bottles and cans? Of course not! Buffet sees this as a huge advantage to the company, and you should to. Next time you choose to invest in a company, check out what it is they are selling!
3) Does the Company Have Good Management?
This one is absolutely crucial. Good management can be one of the single most important factors in choosing an investment. Warren Buffet wakes up every morning, and reads the annual reports of each company he is interested in to see if the management for that company is up to his standards. If the management isn't good, it doesn't matter how profitable the company is, the management can mess it all up. The key here is to really UNDERSTAND what it is you are getting yourself into, and to know what the company plans on doing with your money. What are there plans for the next few years? How has the companies decisions affected their investors in the past? Does the company take some of their profits and buy back some of their own shares? (This can be extremely beneficial for investors... Buffet loves it when companies do this).
4) Does the Company Pay Dividends? (Might Not Be What You Expect!)
How many of you watch Shark Tank? Kevin O'Leary, who happens to be one of my favorite sharks, swears on the fact that you should NEVER invest in a stock if the company doesn't pay dividends. While many extremely wealthy investors agree with this principle, Warren Buffet strongly disagrees. While it is true that receiving a dividend every quarter translates into more money in your pocket, the fact of the matter is that you have to pay income tax every single time you receive this dividend. In addition, when one receives this dividend, one would be smart to reinvest this money into another stock to receive "compound interest." But what if we did our research, and the company has extremely good management? What if instead of paying you this dividend, the company took the money and reinvested it back into their business; or bought back their shares, thus increasing your profits as an investor? Now, the investor doesn't have to pay any income taxes on these gains, and the management is ran so well, (And the company is a Monopoly) that the return they would get by reinvesting their funds into the business, is far greater than the return you would receive by investing this money into a different stock. Think about it... If you are taxed 15-20% every time you receive your dividend, AND THEN reinvest that money, wouldn't it be far better to get taxed 0% and let a great management team use that money to increase your profits even more? This my friends, is the beauty of compound interest and good management.
Warren Buffet is the 2nd wealthiest man in America, and it is actually incredible how "simple" his actions were to receive this fortune. Buffet's company, Berkshire Hathaway, began a progressive strategy of diverting cash flows from the core business into other investments. That's all! They invest and invest some more. It's no secret here that Buffet knows a thing or two about investing, and it's also no secret that anyone else who wants to be financially free should be investing as well... The Buffet way. Buffet makes sure to analyze every single deal carefully and analytically. Rather than blindly investing and trusting others with his money, he studies the market, makes sure that his investments are in the hands of good management, and buys to never sell! Next time you make an investment in the stock market, analyze the Buffet way. Make sure you are fully understanding the company and what you are investing in, rather than just looking at the market trends.You'll be pleasantly surprised that you really don't need a home run to become financially free... Just a few base hits here and there. Thank you all for reading, and feel free to comment your thoughts and opinions. Many more to come!
No comments:
Post a Comment