What Makes a Good Investment

What should we be looking out for before making an investment? Profits, history, dividends, balance sheet, there are so many things that can affect our investment, so which are the most important ones for us to refer to before we decide to invest in something? I'll cover the 5 most important things (with the most important at number 1) that I think we should factor into our decision to invest in something

(Image source: stevepb, pixabay.com)

1. Does it pay us or do we pay it?

Some things like a house for us to stay in may seem like a good investment, but I would prefer to invest in something that pays me instead of the other way around. Investments in a rental property, stocks and bonds are some examples of these that pay us rather than the other way around. I think this is one of my first considerations before investing in something as I don't want to be saddled with an investment that I have to constantly maintain with regular payments, I'd rather they sustain me with regular payouts :)

2. Price

I think this is important, but it also has to be considered together with the next few aspects of the investment which I think are important. The price that we pay for an investment as we all know, can make or break the investment. Too high a price paid and no matter how much the investment pays out and we may still be making a loss over the long run. We have to be careful of overpaying for an investment.

3. Potential growth (for shares)

I thought I should put this above the profits of the company for shares. The growth in the earnings of the company can have more effect on the future earnings of the company than the current earnings. Looking at a company with a 15% growth rate and a 5% growth rate, the one with 15% growth rate will see its profits increase by slightly more than 300% over 10 years while the 5% growth rate company will only see an increase in profits by 63% in the same time frame. That's why I think that potential growth has a larger impact on the decision to invest.

4. Profit history (for shares again)

The profits (and the history of it) is important for me before I invest in a company, the company should have a history of turning a profit and it would be better if it has been able to grow that profit. I'd rather not invest in a potential-filled company that currently has not turned a profit. These castles-in-the-air have led to the dot-com crash, with many companies that haven't even turned a profit selling at exceedingly high valuation (but then again, there are companies such as Uber nowadays that have a >$60 billion valuation without having turned a profit as well)

5. Tangible value

For me, tangible value refers to the tangible assets that back the investment. In the case of shares, it would be the tangible assets of the company minus its debts while for bonds it would depend on the par value and the likelihood of me getting the money back. I think it's important for the investment to have enough tangible value to cover my initial investment as a safety net in case plans fall flat on their faces and things don't turn out as planned. However, I think that profits are more important that this as what good is having so much assets when you are unable to make money off of them?

Conclusion

I think the 5 things listed above are the most important things we should be considering before we invest in something. While 2 of them cover mainly shares, I think that we can also use these when deciding to invest in other things as well such as bonds and rental properties.

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