Investing is a tricky business. What appears to be a good investment in the beginning can turn into a money hole very quickly. On the other hand, an extremely risky investment can sometimes turn out to be extremely lucrative. Knowing how and when to invest is not an exact science. But if you make smart investments over a long period of time, you’re extremely likely to turn a profit.
But how do you know if your investment is a good one? Here are 4 signs that may indicate it to you.
Long-Term, Proven Success
You don’t need to find something that’s going to turn around and make you a million dollars overnight. As an investor (and especially if you’re a beginning investor), you want to look for investments that have a history of success, even if they’re not huge successes.
Consider, for example, how billionaire Warren Buffett started out with investing. He purchased a Nebraska farm and invested in a retail property near New York University in Manhattan. He didn’t do these things because he expected the prices to go up so he could sell later. He made these investments because he knew two things: (1) People would always need corn, and (2) students would always come to NYU.
As Buffett says, “I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field—not by those whose eyes are glued to the scoreboard.”
A smart investment is one that will provide you with long-term, even if gradual, growth and income. So look for investments like these, and you’ll be on your way to a successful investment portfolio.
Company Is Buying Back Shares
Novice investors might think that a company buying back their shares is a sign the company is doing poorly. But that’s not true. Businesses that buy back their shares are typically doing so in an attempt to reduce the total number of outstanding shares.
Essentially, this is reducing the number of “slices†there are of the company’s wealth out there in the market. Fewer slices means that each slice is worth more. Companies do this to try to increase the wealth of their longstanding shareholders. So if you can jump on that gravy train, do it.
You Understand Your Investment
Everybody has something they’re good at. Even if you’re not an expert in investing and finances, you can utilize your knowledge and expertise to guide you in making smart investments. For example, if you have a knack for technology, focus your investments on businesses in the technology industry. You’ll be more aware of shifts in the industry because you’re tuned into it on a personal level. Similarly, if you’re a healthcare professional, you’d be wise to focus your investments on stocks within the realm of healthcare.
Successful investor and entrepreneur Tai Lopez put it this way: “Find one thing in your circle of competence and focus on making it your specialty.†By focusing your investments on things that you actually understand, you’ll be better able to make smart choices on what and when to buy and sell.
The Market Cap Is Good
Here’s where a bit of math comes into play. When researching your stock investment, you need to look at the market capitalization, or market cap, of the business you’re investing in. This is essentially the cost of “buying†all of the stocks, and is determined by multiplying the price per share by the number of outstanding shares.
As an example, say you’re considering an investment in a business at $75 per share, and there are a million outstanding shares. That makes the market cap $75 million for that company. Once you have the number, look at the business’s profits for the last year. If those annual profits are well below the market cap, you’re overpaying for that stock. But, if the profits are more than the market cap, you’re making a smart investment.
Keep these signs in mind when making your investments, and you’ll be more likely to find success over the long run.
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