Investment - A Gamble That Pays

Only 48 percent of Americans have their money in bonds and stocks. What about the rest? It's not just Americans, but several people around the world are afraid of putting their money into companies, prefering bank deposits as a safer option. However, you must understand that investment is an not only an opportunity for the business to make profits but also for you to share the spoils of success. You may think savings is the safer bet, but why would you not venture into the unknown if there is a possibility for greater gains.

When it comes to the world of investing, three words come to many peoples mind: overwhelming, intimidating, and scary. For the "regular Joes," the questions seem never-ending. However, with substantial knowledge and careful research, it is possible for you, a “regular Joe”, to make profitable investments. If you don't believe me, ask Ben Graham, Warren Buffet’s mentor. He himself said, “An investment in knowledge pays the best interest.”

Investment is like betting – it requires the bettor to have information about the team he is placing his money on. Advanced knowledge will help him maximize gains and minimize losses. Hence, it may seem like a given that you should do your homework before plunking down your heard-earned money on a company's stock. But many people don't. Therefore, it is important to address the following questions:

• What does the company do?
• Who runs the company?
• Who are the company’s competitors?
• What do the company’s financials say?

What does the company do?

Warren Buffet famously said he doesn't invest in what he doesn't understand. If the greatest investor of the past 60 years is brave enough to acknowledge that he doesn't understand all companies, we should all probably take heed. As an investor, it is important that you understand the company you are investng in. This infomration can be accessed through company websites and several forms of social media, such as television and newspaper.

Although this may seem a simple question, the answer is quite hard. You must have sufficient knowledge of what the company does to understand and predict its actions. Additionally, there should be a market for the products or services the company is offering. If a market does not exist, then the company would not be able to generate sales, hence end up experiencing poor growth, which would not make it a suitable investment option.

Argument: Likewise, in betting, the punter must have knowledge of the sport his team plays. Without a basic understanding of the game, he is unable to anticipate the flow of the game, and almost likely to lose all his money.

Who runs the company?

As an investor, it is important you have knowledge about the CEO. This valuable information can be obtained through a face to face conversation with the CEO himself and or an extensive secondary research. Research could be done through checking the company website, following relevant articles, trade publications and statements of management in the annual reports. Knoweldge about the CEO can shape an investment decision significantly due to the following reasons:

• An investor who shares a similar vision and value to the CEO of the company would be lured into investing in the company. For example, if you, the investor and the CEO both share an attitude towards aggressive growth over a steadier approach, it is likely that you would see the company as a suitable investment.

• If the CEO and management can execute their vision, then it is a certainty that investors will place their confidence in the company. Many companies stumble on the execution phase. Therefore, the ability of the management to enact on their vision to achieve the goals will prompt any potential investor to make an investment.

Argument: Every bettor places his confidence on the manager of the team. The team may comprise of quality players but it's the manager’s job to make the team tick. Hence, be it a weak team, as long as the bettor has faith in the manager to use his tactical knowledge to produce the results, he will place his money, even against the odds.

Who are the company's competitors?

For every Coke there is a Pepsi. Companies are almost always operating in a competitive environment. They don't operate in a vacuum, and must strive to be the best in the business. To consider investing in a business, you must gather sufficient data on the type of market and the number of competitors. Whether the company operates with few or many competitors, it is important to see whether the company can sustain the competition and grow. Besides, knowledge of the company’s market share is crucial in understanding its current position in the market. For example, if the company commands a large share, it is likely that its products are favored over that of its competitors. Hence it can raise its prices without experiencing significant drop in sales. This would be a definite sign for investment, as the firm has a powerful stake in the market. Additionally, pricing, quality of goods and services offered and brand name serve as potential factors in determining an investment option.

Argument: Similarly, if I was a placing my money on a team, I cannot just go by the team and its management. I must understand its opponent and its position and image in the game. A bettor would be more confident in placing a bet on a team at the top of the table, producing positive results over one languishing at the bottom with a poor display.

What do the company’s financial say?

No matter how much effort one puts in one’s task, it's the end result matters. Accessing financials is easy, but understanding which ones make sense is far more complicated. Public compaines release quarterly and yearly financial statements with their income statement, balance sheet, cash flow position and list of financial rations, documents every investor must have a peek into. The first check is a high profitability ratio (net profit / sales). The company may be generating high sales and high profits; however, if its ratio is low, it indicatess a high operating cost. This could indicate a company’s growing expenses and inability to function without borrowing., consequently proving a red light for investment. Secondly, the company must be in a strong liquidity position. It must be able to generate enough cash to fulfill its short term and long term debt obligations. Additionally, it should hold a low debt ratio, which is the amount of debt a company carries in comparison to the amount of equity shareholders have in the company. This tests how well the company can repay its debt obligations in the event that it runs into serious financial problems. Generally, the lower the debt-to-equity ratio a company has, the less risky it is to you as an investor. Although these financials hold key to the decision, it is necessary for an investor to observe that company has a good history of earnings and growth. You must understand the balance sheet to compare its debt to earnings and observe the cash flow position of the firm to make sure it wont run out of cash to fund operations.

Argument: This is quite simple. A punter will always look into the statistics of a team. There is a lot of data to draw from, but it is important for the bettor to pick the data that matters. This of course varies from game to game. For example, in soccer the team with the highest win ratio will be the popular option.

Conclusion
Do not ask me how I  know so much about betting, but it is certain that investment is similar to betting. Both are heavily dependant on prior knowledge and definitely entail a risk factor. Not all your investments will generate profits, but over time you will be able to improve your stock portfolio so that you maximize your gains.

It is important that you take it step by step. Pick an indstry that suits you and research possible companies with growth potential. Watch the companies carefully, observe their financials, competitors and management decisions. Finally select a company that you believe has great potential for investment. Slowly expand into multiple companies and eventually industries. “Succesful investment takes time, discipline and patience.” – Warren Buffet. Be patient and you shall reap the rewards.

Works Cited

"10 Questions to Ask Before You Buy a Stock." TheStreet. N.p., 27 Aug. 2015. Web. 29 Sept. 2015.

"5 Things Goldman Sachs Looks for in a Company Before Investing." Inc.com. N.p., n.d. Web. 29 Sept. 2015.

Forbes. Forbes Magazine, n.d. Web. 29 Sept. 2015.

"What Is Warren Buffett's Investing Style?" Investopedia. N.p., 25 Jan. 2005. Web. 29 Sept. 2015.

Half, Less Than. "Over Half of Americans Have $0 in Stocks." CNNMoney. Cable News Network, n.d. Web. 29 Sept. 2015.