The key is to know what you’re investing in! Top investors like Warren Buffett, Peter Lynch and Benjamin Graham where all believers of this and they seem to have done pretty well. If Buffett couldn’t easily understand an investment or know exactly what a company does to generate income then he wouldn’t touch it. This might appear like I’m pointing out the obvious however, let’s take a commonly known company and have a look at its pricing. Facebook.
When Facebook first launched on the Stock exchange the banks had given it a price of $38 per share meaning a total valuation of $104,000,000,000; the banking wizards gave this company a cool valuation of $104Billion - a tech company with no real income or verified long-term business model being valued at 104billion dollars - Makes you wonder how they came up with such a fantastic number?! Now, we use Facebook everyday but what do we actually do on it that generates sufficient cash to justify such an astronomical value. Answer...not a great deal. As of today, 3rd June 2013, which is nearly 2 months after it’s May 16th launch, the company is valued at $24.44 per share or 36% lower than originally valued. Also, to put this into perspective the average American company has a ratio of share price to company earnings of around 12, Facebook’s....2,049.5!!!!!!!!!!!!!! This means that even though the price has been cut by over a third there is still room for it to potentially drop. Don’t get me wrong I’m not saying it will as the advertising / gaming stream might pick up, but justifying this price without the income to prove it I personally feel will be a tough job.
So, why did I put you to sleep with a not so musical rendition of Le Facebook? It was to highlight an important point. If you are pouring your cash into an investment know what you are buying, why you are buying it, and the best price at which to buy it. Whether it’s a share, a mutual fund or a property if you pay too much you may find it difficult to get good returns.
Sometimes an investment story sounds so good you want to hand over your money on the spot however, If an investment looks like it could be suitable for you check out the finer details and bounce some ideas off your financial adviser / stock broker / lawyer. Or if the investment idea has come from your adviser ask questions to ensure the idea is sound and solid; one of the most powerful questions is to ask Why? Why is it a good investment, why is it suitable to you, why buy it at this price, why buy it in these economic conditions...you get the point.
Pay a fair price, or if you’re lucky and know something other people don’t and pay below the market rate. Having reliable research is pretty important when making your decision so use various resources and cross check them to get a complete overview of the investment. When buying shares or mutual funds this is quite straight forward – Use your adviser, or be smart enough to use your own! When buying property look at similar properties in the area, check the Land Registry (or similar land registrars in your country: http://en.wikipedia.org/wiki/Land_registration) to see how many properties have been sold recently and at what price. Utilise local knowledge by calling estate agents / property advisers who will gladly help if they think they can get a sale from you!!
The more you know about your investments the better equipped you are to negotiate great deals.
It’s always good to listen to new investment ideas, at the end of the day you don’t have to buy it but, like with most things, knowledge is power.
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