It seems amazing that you can get these kinds of returns investing. The idea that you have to take on a lot of risk to realise these kinds of returns is simply a myth. The real truth is that you need to know how to value a company and pick bargains. Any of the great fund managers can get 50% returns per year, or more, on small amounts of money. These great returns are over a long term period of at least three to five years.
How to Pick Winners - Return on Capital
The most important thing is to look for in an equity research the return on capital. A company that has an above average return on capital is in a very special position. They can generate more amounts of cash and then invest them in the business and get higher rates of return. To calculate the return on capital, take the companies earnings / dollars invested = return on capital.
The idea is simple. Would you rather invest in a company that needs ten million dollars to generate a one million dollar profit or would you rather invest in a company that can turn 10 million dollars into 50 million dollar profit in the same amount of time. The idea may seem obvious, but there are lots of companies and industries out there that have a very low return on capital and people continue to invest them.
Earnings Yield
The earnings yield is another most important thing to understand. To calculate, you take the earnings per share / price per share. The answer will give you a rate of return. You can take that number and compare it more easily to bonds and other investments to see if the return is good. The main point of the earnings yield is to tell you if the company is being sold to you at a bargain price or not. It may be a spectacular company, but still be priced to highly.
Getting the High Returns
It is really that simple. Find companies that have a high return on capital and that have a high earnings yield. The return on capital tells you whether it is a good business and the earnings yield tells you whether it is a bargain or overpriced. These two figures are really all there is to making spectacular returns.
What to Avoid
A lot can be said here. To get great returns, you must avoid, annuities, mutual funds, cash value life insurance, advice from brokers, and stay the course over a 3-5 year period of time. This is not a short term trading strategy.
Why You Can Beat a Harvard MBA Fund Manager
It may sound cocky to beat a great fund manager, but it can be done. The reason is that mathematically it is much more difficult to grow large amounts of money. Once you get your foot into investing, you must do your own homework and trust your own math. Nobody is going to tell you how to invest wisely. It just doesn't work like that.
The hardest part about reading this is actually believing that it will work, doing your homework, and staying the course. Everybody wants to believe there is a tooth fairy, but the truth is that there isn't one.
No comments:
Post a Comment