The Third Secret to Successful Investing
Buy Quality Companies at bargain prices
Jimmy Buffet is the singer of popular music extolling the laid back lifestyle. Warren Buffet is the investor we all want to be. Now worth billions of dollars, he didn't get rich overnight or by investing in things he does not understand or has little real value. Much has been written about his investment style. It really boils down to buying quality companies at bargain prices and holding onto them for the long-term, selling only when they have reached the full value you think the company, stock or investment is worth. Warren Buffet did it with stocks, but the same principle applies to any investment. The old adage of "Buy low and Sell High" still applies.
Warren Buffet studied the great investors and learned the value of buying first quality companies, but second buying a bargain prices. What makes up a great company? There are number of factors you want to look for before you invest in the common stock of a company, including:
Quality management A company's management must be honest and run the business in the best interest of the shareholders.
Positive cash flows Now that just fancy talk for earning more cash than is necessary to stay in business and then directing that cash to activities that help the business grow or returning cash to shareholders in the form of dividends. The measurement for positive cash flows you want to use is called return on equity.
High Profit Margins A companies net profit margin is determined by dividing all the money left after paying all of the expenses by the amount of money it had before paying expenses. It is really a simple ratio to determine but tells you so much about companies financial performance and how it manages money.
Buy at Bargain Prices The way most successful investors (like Warren Buffet) determine the value of a company is to project future cash flows and discounting them back to the present value compared to a benchmark like the rate on long-term U.S. government bonds. I know that sounds complicated, but today with the internet you can look up this information, or get it from your stockbroker.
If you find a stock that is selling just under what it is worth, don't buy it, the risks are too high. When you find a company that is selling well under it's real worth, that's the time to buy. Now these methods may be too complex to follow, but the intention is to find stocks selling a sharply reduced values and buying them. After the market crash of 2008, this became easy to do and the smart money came back into the market to snap up companies selling a sharp discounts to their true value. You can do the same thing.
If you would like the author's free "10 Secrets to Reduce Investment Risks while Maxing Out Your Profits", just drop him an email - floyd@floydsaunders.com
The Third Secret to Successful Investing
By: Floyd Saunders
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