Buying a good stock, piece of real estate, a business, or any other asset requires knowing the actual value of the asset. Sort of goes without saying, right?
After all, if it's a "good" or "great" investment (please define "good" or "great"), it's only "good" or "great" in relation to the price I've paid for it and the return I've realized.
But how many times have you or I purchased something we thought was a good investment, only to realize later we bought fool's gold?
If we're to know we got a good bargain on any asset purchase, we need to know the true and relevant value of whatever we're acquiring. Knowing the underlying or intrinsic value of an asset is what separates the professional, high-return investors from the wanna-be's majority of amateur, low-performing return loosers.
Perhaps calling anyone a looser is simply unrefined and a bit harsh. But reality shows us that most folks simply choose not to do the research required to separate the gold from the dirt. There are more false-gold, "pretend" assets in the market than ever before. Peddlers of stock-tippers, mutual funds, annuities, bonds, etc. will gladly sell you a dollar of value in exchange for your giving them 5 or 10 or 100 or more. (And count your lucky stars if there really's even a dollar's worth of value there at all, for there are just as many pretend assets that are absolutely worthless - true liabilities and nightmares for the owners who try to manage them -- this statement being more true for privately held companies than those publicly available through the stock market).
(I might add that most "professional" money managers rarely eat their own cooking -- that is, they don't invest their money the same way they would a client's. Therefore, they're not usually professional investors, but rather "professional" advisors. If these "professionals" were awarded the title 'professional' on account of their actual performance as investors, rather than through a licence issued by a not-so-well-informed government on account of a multiple-choice exam (really?), we would see a lot less professionals giving us advice on how to invest our money.)
Let's just make a simple step-by-step guide. That's what most folks want nowadays, after all - a simple formula, a quick fix, rather than a paradigm shift, or a new frame of reference or a sound philosophy - (you know: the stuff that really matters...). Nope, we're the fast-food nation - we want it now, quick, dirty, and we don't care about the details of the meat we're eating.
So to appease the majority - here's 3 tips for investing.
1) Know the value of the acquiring asset. Do the research, put in the time and effort to truly know the risks of owning the asset, the history of performance, the people you'll be dealing with or who will be managing your asset.
2) Know the market is filled with fool's gold, and pretend assets - be willing to separate the wheat from the tares - the former is few and may not show up for many years, the latter is always in abundance for the taking, and for those of an impatient disposition.
3) If you're too impatient to do the research on a stock, too timid to negotiate and work a good deal on a piece of real estate, or you don't have the balls for buying a privately held business and all the risks that entails, then do yourself a favor: buy a broad index fund and dollar-cost average your way to mediocrity and hope for the best - you've just joined the majority who invest exactly the same way. (tip: such typically have an entitlement mentality however, which is just too bad. These folks want to get an 8-10 percent annual return over the long term, as if they're entitled to it.) Still, this method is best for those unwilling to invest the time to really search out, weed out, and make out with a good asset.
When we truly grasp the reality that there just might be a dollar's worth of value being sold for fifty cents in the market, that idea is very empowering. It means I can take a small piece of pie and trade it in for a bigger piece of pie. While I embrace this fundamental idea as a reality of the world we live in, it does have a bit more of a zero-sum, 'I win, you loose' price tag attached to it. People who know me know me to be extremely frugal - I'm working on it.
But when we take the idea of exchange one step further and realize there really are an unlimited number of needs in the market just waiting for someone to come along to fill them - that is, to align the marketplace horses in the direction they're already going - that assets can be created out of thin air by those willing to take a little initiative - that paradigm of absolute freedom to act and create, that "no-money-required," and "everyone wins" philosophy opens up a whole new world of possibilities and realities. This second idea transforms the pie, makes it bigger for everyone involved.
Think of assets as units of freedom. The more units you have, the more freedom you have to take your time, to be patient, to research, discover, create, negotiate, and explore possibilities. Those with greater material wealth are often better positioned to take advantage of, (and are often found carrying a more abundant supply of), this thing we call patience.