After reading the quite a number of books on investment including Rich Dad’s Guide to Investing, I have concluded that it is important to treat any investments as if I am going to buy over the business. What do I mean by that?
For example, if I were to buy a share of a company, then I would be one of the many shareholders who own the company. Yes, I would only own a very little portion of the company. But that does not give me the excuse that I should treat my investment decision lightly just because I am a small investor. I must treat any investment decision as though I am going to buy over the business. If I am not interested to buy over the company, then why should I be interested in investing any money in that business at all?
If I am going to invest as if I going to buy over the business, what type of business should I invest in?
Before I can answer this answer, I feel that I must think like a business owner first. When I think like a business owner, then I will understand the pros and cons of various types of businesses. Also, I will be able to identify and manage the risks involved. This will help me to make a better investment decision.
As a business owner, I definitely want my business to be profitable. Thus, the first thing that I want to do is to find out whether the business that I am interested to invest is profitable. If it is not profitable, then I will not want to invest in it.
The second concern that I have is whether the business can continue to be profitable in the long run.
To address this issue, I will need to look at a few factors.
Firstly, does the business have a competitive advantage over the others in the same industry? If the answer is yes, then the chance of the business continues to make profit in the long run is increased. Otherwise, the chance of the business continues to make profit in the long run is decreased.
Secondly, is there a barrier to entry for that particular industry? If the answer is yes, then there is little or no risk of copycat businesses that will come into play and steal away the profits. If the answer is no, there is a high chance of other copycat businesses that will come into play and eat up the market shares.
Thirdly, does the business need to reinvent itself frequently? If the answer is yes, then there is risk that it will lose its competitive advantage if it does not. That is the competitive advantage of the business is not durable and easily lost. This means that it may not continues to make profit once the competitive advantage is lost.
Lastly, does the business need to spend a lot of money to reinvent itself? If the answer is yes, then it may not be a good business to invest in since there is a lot of wastage. For example, a transport business will always need to spend money to buy new transportation vehicles. It will also need to spend lots of money on maintaining and repairing the transportation vehicles. In other words, a large portion of the profits is used for reinventing itself. And there is little left to build the cash reserve.
As a business owner, I will definitely want my business to continue to make profit in the long terms.
My third worry is that whether the business is rich in cash reserve. If a business is rich in cash reserve, it means that there is no risk of the business going bankrupt because cash flow problem. A profitable business should be rich in cash reserve.
Next, I will be interested in what is the return on investment on the business. For example, if I were to invest $1000, what is the expect return per annum. If the return on investment is very little like $1 for every $1000 invested, then it does not make sense for me to own the business. If the return on investment is high like $200 for every $1000 invested, then it make sense for me to own the business because I know that I am not risking a lot of money for a little return.
Lastly, do I understand the business? If I do not understand how a business works and makes money, then I will not be able to identify the risks involved. If I do not know the risks involved, then I do not know how to manage the risks. Then, I am likely to lose money. If that is the case, then it makes sense for me to invest only in businesses that I can understand.
The above are just some of the considerations that I can think of at the moment. These considerations are based on what I have learned so far about investment. It is definitely important for me to think like a business owner if I want to invest properly to accumulate great wealth.
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