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Green Stocks |
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Rule #1 - Do not lose money! Rule #2 - Never forget rule number 1! ( by: Warren Buffet )For comments or questions please email: : admin@equityresearch.com |
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Margin of SafetyWarren Buffet reminds us that a good investment must have a margin of safety. This is one of the most fundamental concepts that you have to get in order to really succeed at investments. The idea is that a companies earnings can fluctuate due to business conditions. If the company has a setback, will they be able to handle it or will they go in the red. As an investor, you need to calculate how much safety the company has. Does everything need to work perfectly for the company to succeed? If there is no safety, avoid the stock. When Will You Suffer a Loss?This is the heart of the question. Do you understand the company well enough to know at what point the company won't be able to keep the stock price high or pay its bills? If you do not understand where you might lose out, you are speculating and not investing. DangersThe easiest way to obtain a loss is to invest at the top of the market. When securities are priced for perfection, they are certainly going to fall. Another danger is that investors may buy stocks that aren't representative of the overall economy. They may find something a bit obscure or an out of touch company. Investors should look for a solid company that represents a real need in the economy. Dollar cost averaging helps reduce the risk associated with buying in at too high a price. Over time, investors will buy in at highs and lows. They will be averaged out and it reduces risk. If you purchase everything at once and the market is too high, you could permanently lose a lot of money. Top RiskPerhaps the top risk for investors is that during economic expansion. When the market is doing well, almost all the companies are making a profit. It appears that everyone is doing great. In these times, some obscure companies often make a great streak for two or three years. Investors make the mistake of thinking that the company is good because of the recent prosperity. However, it is not true. Earnings and dividends must be tested over a more lengthy period. Many of these middle road companies suffer great losses when the economy turns downward. Some of them will recover, but most will not. The main thing is do not think all is well because an investment is doing well right now. Instead look at the long term horizon and try and understand which company will come out on top in a recession or depression. Put your money in the company that you think can make it no matter how bad things get. DiversificationDiversification is an important factor in reducing risk. As you diversify, it increases your chances of positive investment because a single bad choice won't take down the ship. Final TipTo invest, you should base the decision on mathematics. You should not make decisions on whims or because of an exciting news article. Don't place your trust in other people. Do the due diligence yourself and come up with your own calculations. You will become a much better investor that way.
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