Keys To Successful Investing
By Members Desk
April 5, 2022
0:00 / 8:19

Okay. So how do you be a successful investor? Now? I'm assuming that you're not going to go into the business of investing and assuming that you're going to be a doctor or a lawyer, you're going, gonna pursue your passion, but you're gonna have some money. They're going to save over time. And I'm going to give you my advice on the topic.

It's not necessarily definitive advice, but it's one, the advice I would give my sister, my grandmother on what she should do if she were in the same position. I think that's probably the right way to think about it. So, number one, how do you avoid losing money? What are good places to invest? Well, my first piece of advice is despite the story about the lemonade stand out, avoid investing in lemonade stands.

I'd avoid investing in startup businesses where the prospects are not very well known, because again, you don't need to make a hundred percent a year to have a fortune. You just need to invest at an attractive return. 10, 15%. Over a long period of time, your money grows very significantly. So how do you avoid the riskiest investments?

I would, my advice would be to invest in public securities, invest in listed companies that trade on the stock market. Why? Because those businesses are tend to be more established. They have to meet certain hurdles before they go public. The stocks are liquid so you can change your mind if you want to sell.

If you invest in a private lemonade stand, it's hard to find someone to take you out of that investment, unless that business becomes fabulously profitable. Piece of advice. Number one, invest in public companies. Number two, you want to invest in businesses that you can understand what I mean by that is there are lots of businesses that you come in, that you deal with in the course of your day and your personal life, whether it's a retail store that, you know, because you like shopping there, or it's a product your iPad or that, you know that you think is a great product, but you understand, you'd have to understand how the company makes money.

The business is just too complicated. You don't understand how they make money, even if they've had a great track. I would avoid it. A lot of people thought Enron was an incredible business because it appeared to have a good track record, but very few people understood how they made money. It was good to avoid it.

Another very important criteria is you want to invest at a reasonable price. It could be a fabulous business. That's done very well over a long period of time, but if you pay too much for it, you're not going to earn a very good return. The last bit is that you want to invest in a business that you could theoretically own forever.

The stock market were to close for 10 years. You wouldn't be unhappy. What do I mean by that? You know, again, if you're going to compound your money at a 10 or 15% return over a 43 year period of time, you really want a business that you can own forever. You don't want to constantly have to be shifting from one business to the next and what are businesses that you can own forever?

Well, the very few that sort of meet that standard maybe a good example is Coca-Cola right. What's good about Coca-Cola is it's relatively easy business to understand you understand how Coke makes money, right. They sell a formula syrup, oh, yeah. Two bottles into retail establishments, and they make a profit.

Every time they serve a Coca-Cola people are gonna drink a lot of Coca-Cola for a very long period of time. The world's population is growing. They sell in almost every country in the world and each year people drink a little bit more Coca-Cola so it's a pretty easy business to understand. And it's also a business that I think is unlikely to be competed the way as a result of technology or some other new product, right.

It's been around a long. People have grown used to the taste. You know, they parents give it to their children and you can expect that we'll be around a long period of time. I think that's one good example. Another good example might be a McDonald's you may not love McDonald's hamburgers, but it's a business that has been around for 50 years.

You understand how they make money. They open up these little, build these little boxes. They rent them to the franchisees. They charge them royalties and exchange. The name and they sell hamburgers and French fries and you know what people have to eat. It's relatively low cost food. The quality is pretty good and their growth.

They continue to grow every year. So I think the consistent message here is try to find a business that you can understand. That's not particularly complicated, but has a successful long-term track record that make an attractive profit and can grow over time. So what are the key things to look for in a business?

As I say, that lasts forever, we want a business that sells a product. Or a service that people need, and that is somewhat unique. And they, they have loyalty to this particular brand or product, and that people are willing to pay a premium for that. I mean, a good is another good example. What might be a candy business while people are willing to buy generic versions of many kinds of food products, you know, flour, sugar, they don't need to have the branded product when it comes to candy.

People don't tend to like the Walmart version of the K-Mart version. They want the, you know, the Hershey chocolate bar or the Cadbury chocolate bar or the see's candy, they want the brand and they're willing to pay a premium for that. And so that's, I think a key thing. You want the product to be unique.

You, you don't want it to be a commodity that everyone else can sell because when you sell a commodity, anyone can sell it and they can sell it at a better price. And it's very hard to make a profit doing that. If you're investing for the longterm, you want to invest in businesses that have very little debt.

In our little example, before we talked about eliminates. Yeah, there's $250 worth of debt that didn't put too much pressure on the lemonade stand company. But if it had been a thousand dollars, we hit a rough patch. The business could have got on a business for failure to pay its debts. The shareholders could have been wiped out.

So if you can find a company that can earn attractive profits, it doesn't have a lot of debt. They generate vastly more profits than they need to pay the interest on their debt. That's a safe place to put your money over a long period of time. You want businesses that have what people call barriers to entry.

You want a business. It's hard for someone tomorrow to set up a new company, to compete with you and put you out of business. I mean, like going back to the Coca-Cola example, Coca-Cola has such a strong market presence. You know, people have come to expect when they go to a restaurant, they can ask for a Coke and get a Coke.

It's very hard for someone else to break it. And then of course there's Pepsi and there are other soda brands, but Pepsi has been around a long time. Coca-Cola and Pepsi have continued. Exist side by side, over long periods of time. So when you're thinking about choosing a company, make sure that they sell a product or a service that's hard for someone else to make a better one that you'll switch to tomorrow.

You also want businesses that are not particularly sensitive to outside factors. Extrinsic factors that you can't control. So if a business will be affected dramatically at the price of a particular commodity. Or if interest rates move up and down, or if a currency prices change you, you want a company that's fairly immune to what's going on in the world.

And I'll use my Coca-Cola example. I mean, if you think about Coca-Cola, it's a product that's been around probably 120 years over that period of time, there've been multiple world wars development of nuclear weapons, all kinds of unfortunate events and tragedies and so on and so forth. But each year the company pretty much makes a little bit more money than they made before.

And they're going to be around and you can be confident based on the. That this is a business that's going to be around almost regardless of whether interest rates are at 14% where the us dollar is not worth very much, or the price of gold is up or down. Those are the kinds of companies you want to invest in the long-term businesses that are extremely immune to the events that are going on in the world.

Another criteria, if you think back to our lemonade stand. As we grew, we had to buy more and more lemonade stands and those lemonade stands only costs $300 each, but imagine a business where every time you grew, you had to build a new factory produce more and more product. And those factories were really expensive.

Well, that company might generate a lot of cash from the business, but in order to grow, you're gonna have to just reinvest more and more cash into the business. The best businesses are the ones where it doesn't, they don't require a lot of capital to be reinvested in the company. They generate lots of cash that you can use to pay dividends to your show.

Or you can invest in new high return, attractive projects. I guess the last point I would make is that your name invest in public companies. It's probably safest to invest in businesses that are not controlled companies, kind of like our lemonade stand business that we took public, but problem with a controlled company, unless the controlling shareholder is someone you completely trust.

And unless there's someone that has a great track record for taking care of minority investors than non-controlling sure. You can be a risky proposition to invest in that business because you're at the whim of the controlling shareholder. And even if the controlling shareholder today is someone that you feel comfortable with, there's no assurance that in the future, they might sell control to someone else.

Who's not going to be as supportive of the shareholders in the business. So it's not that you just, you can simply have a profitable business and a business that has done well. You have to make sure that the management and the people that control the. Think about you as an owner and a can protect your interests.

So these are some of the key criteria to think about.