Paper Assets | wealthymatters

The Perfect Business

March 1, 2011 3 Comments

The best and easiest way to make money either as a businessperson or an investor is to get hold of an as near to perfect business as possible.The best businesses have the following features:

High profitability. If the business provides customers a product or service they need or want very much, and only this business can provide it, and there are few substitutes available then this firm can charge a premium price far above the costs it incurs.
High returns on capital. A business with high margins ceases to be very attractive if it is very capital intensive and requires massive amounts of capital to launch and/or remain in business. The greatest businesses require little or no money to start, can grow without major additions of capital, and do not require much maintenance cap ex.
An enormous moat. To ensure high margins and return on capital in the future it’s critical for a business to have major competitive advantages that are unlikely to dissipate over time. The key here is lack of change .Rapid change as in the hi- tech sector,benefits consumers but is very bad for investors. To quote Warren Buffett, “We see change as the enemy of investments… so we look for absence of change. We don’t like to lose money. Capitalism is pretty brutal. We look for mundane products that everyone needs…. I guarantee that Coke, Wrigley’s , and Gillette will dominate. The Internet won’t change what brands people like.”
Profitable reinvestment opportunities. The greatest businesses can reinvest their robust free cash flows back into the business at equally high rates of return on capital. Consider this: Warren Buffett has often lamented the fact that See’s Candies has never been able to expand much beyond its historical West Coast markets. It’s a fabulous company and was one of his best acquisitions ever, but the inability to reinvest its free cash flows back into growing its operations makes it an inferior business to, say, Wrigley, which has been able to grow globally over the years. Read more of this post

Filed under Entrepreneurship, Paper Assets, Theory, Tool Kit Tagged with accounts payable, accounts receivable, businessperson, cap ex, capital intensive, Cash Conversion Cycle, cash flow, Coke, competitive advantage, entrepreneur, free cash flows, gillette, growth, inventory, Investor, Perfect Business, postaday2011, profitability, RandomBlog2011, Return on Capital, See's Candies, Warren Buffet Quotes, Warren Buffett, Wrigley's

The question why some people accumulate substantial wealth and others struggle so much in this field has attracted the attention of quite a few psychologists.There have been many studies to correlate various personality traits and behaviour patterns, cognitive patterns , self motivation habits, moods and emotional behaviours and social behaviours with the wealth a person accumulates.

The results of these studies have been used to construct the various quizzes here http://www.marketpsych.com/personality_test.php .They are free and a pretty good way to get to know both one’s strengths and weaknesses as an entrepreneur , investor and/or speculator.

Taking these tests is a great way to get to know the strengths we can play to and the weaknesses to guard against.The results sheets also have many good psychological tips to work around our individual weaknesses.

Filed under Entrepreneurship, Paper Assets, Theory, Tool Kit Tagged with behaviours, cognitive patterns, emotional behaviours, entrepreneur, Investor, moods, personality traits, postaday2011, psychology, psychology of wealth, quiz, RandomBlog2011, self motivation, Speculator, tests, wealth

The Right Approach To Long Term Investment Success In The Stock Market

February 24, 2011 2 Comments

There are many ways to make money in stocks. But not every way works well over longer periods of time.There are people who never make any money from stocks and there are others who make significant amounts of money in the stock market only to lose it again.To understand how to make money from stocks and keep it the long term we need t0 study the habits of investors who have remained successful over a long term.Such an exercise shows that the odds of long-term investment success are greatly enhanced with an approach that embodies most or all of the following characteristics:

Thinking about investing as the purchasing of companies, rather than the trading of stocks.
Ignoring the daily noise of the market. As Graham wrote in his classic, ‘The Intelligent Investor‘, “Basically, price fluctuations have only one significant meaning for the true investor. They provide him an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times, he will do better if he forgets about the stock market.”
Only buying a stock when it is on sale i.e. available at a discount to its intrinsic value.
Focussing first on avoiding losses, and only then think about potential gains. “We look for businesses that in general aren’t going to be susceptible to very much change,” says Warren Buffett “It means we miss a lot of very big winners but it also means we have very few big losers…. We’re perfectly willing to trade away a big payoff for a certain payoff.” Read more of this post

Filed under Paper Assets, Theory, Tool Kit Tagged with Benjamin Graham, Bill Miller, Common Sticks and Uncommon Profits, discount to intrinsic value, Legg Mason, Long term stock investment, Peter Lynch, Philip Fisher, postaday2011, RandomBlog2011, share market, stock investment, stock share, The Intelligent Investor, Warren Buffett

Have You Got It In You To Be A Good Stock Market Investor ?

February 23, 2011 5 Comments

Can you honestly say ‘YES’ to the following questions ? If so, you are cut out to be a good investor if you have good systems in place,cultivate good investing habits and gain sufficient experience.

Are You A Businesspeson ? Warren Buffett has been known to say”I am a better investor because I am a businessman, and a better businessman because I am an investor.”A businessperson understands how his/her own companies work and respond to their environments.He/she can then extrapolate this experience to look beyond the numbers of other companies.And this makes them better investors.
Are You Sufficiently Brainy ? Being a top notch investor requires a certain amount of brains-the sort of IQ that the average college graduate might have.But EQ is equally important.Too much IQ and a person will handicap himself and too little might make the constant learning associated with investing a drag.Warren Buffett has been know to say that”Success in investing doesn’t correlate with I.Q. once you’re above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
Are you good with numbers ? Advanced math such as calculus is irrelevant to your success as an investor.But you do need to master pre-university math concepts and constantly apply them in daily life while thinking about your investments.Also you should be able to seize on the most important nuggets of information in a sea of data and act upon them
Can you remain confident and humble at the same time? You need the confidence to act on your independent analysis,literally put your money on the line despite what the world round you might be doing.But on the other hand you need to be able to accept that you are not above making mistakes or missing out on something that’s obvious to others.You need the humbleness to listen to others,to stick to stocks and businesses that you understand,to stick to investing methods you know , to avoid excessive leverage and to diversify sufficiently to avoid being wiped out by a wrong call. Read more of this post

Filed under Paper Assets, Theory, Tool Kit Tagged with Heuristic Thinking, postaday2011, RandomBlog2011, stock market investing, stock market investor, stock share, successful stock investing, Templeton

Dealing With The Shortcomings Of The Human Brain

February 21, 2011 2 Comments

Since we can’t overcome the tendency of the human brain to make mistakes while working through heuristics , here is a list of things we can do to reduce the effects of the shortcomings of the human brain.The more we can incorporate these points into our investing procedures and systems , the better the quality of our returns.The checklist is form Whitney Tilson’s ‘How to Avoid – and Profit From – Manias , Bubbles and Investor Irrationality’.