Monthly Archives: October 2010
Finding Winning Investments
Remember that you can have a very successful investment career with a completion rate of less than 1%. Investing is a strange game in that most of what you work on will never actually happen. You need a unique personality to cope with that aspect.
In the gaps between deals, your return criteria are tested and you’ll be tempted to dabble just to do something. Remember the key five from last week and stick with the fundamentals.
When I come across a deal that fits my criteria, there are three questions that I ask myself.
What’s the vendor’s motivation and why am I being offered this great deal? You can not afford to overpay and hope that leveraged asset inflation bails you out – that’s just for professional investors that use other people’s money.
On Capital & The Key Five
Free Capital is money that you have readily available to make investments — it is available quickly for investment. What is an investment deserves a separate article – so I’ll save that for later. Net Worth
Simply put your net worth is your assets less your liabilities. Because assets are more visible than liabilities, we often make the mistake of assuming people with lots of assets have lots of net worth. In a crisis, free capital is much more valuable than net worth (also called equity). Acquiring Capital
You can be the best investor in the world but, if you don’t have any capital to invest… well, you won’t be particularly successful. So, to create financial stability, the first habit you need is the ability to acquire capital. The answer is simple, but not easy: always spend less than you earn. The only time you want to vary that rule is when you make an investment. The Key Five on Investments:
- Limited in number across our lifetime
- Generate a net positive annual return
- Preserve capital
- Have an ability to sell in all market conditions
- Make a positive impact on our life situation
This is the first place where the reality of personal investing differs from human nature and the media. People will try to convince you that the Key Five don’t apply. When you hear someone talking like that look for where they make their money.Ultimately, acquiring capital has to do with not losing capital… the Key Five are essential to remember. The discipline they impose will rule out many schemes that can get you into trouble. Some common schemes:
- Second home – typically cash flow negative annually – therefore a luxury good, not an investment.
- Cars, bikes, motorized anything – high cost of ownership, depreciating asset – treat as expenses.
- Gold, commodities – realize that you’re gambling and any positive return is due to chance.
- Stocks & Bonds – I lack the knowledge and confidence to make a bet large enough to have a material impact on my life.