Good vs Bad Investments sure thing investments

Good vs Bad Investments

You want to know what the sure thing investments are? I hear it all the time. “Gold is the best investment” or “Real Estate is the best investment”, or “stocks are too risky”.  People love to talk about investments as though they are feelings or recipes.  They assign these general labels to something, but never really get very clear on the actual intrinsic value.  Here’s the truth.  A good or bad investment has less to do what investment it is and more to do with what price you pay for it.

 

Good vs Bad Investments sure thing investmentsFor example, let’s say that that gold has averaged $1,500.00 an ounce over the past 6 months.  If I go to a retail store and pay $2,000.00 for an ounce of gold, I’d call that a bad investment.  But if I went to an estate sale, and found a piece of gold that was only selling for $750.00 per ounce, that’s probably a really good investment.  Why? Because you bought it at a discount compared to its intrinsic value.

 

How about real estate? Is it one of the sure thing investments? Well, if you go to your local real estate agent and fall in love with the nicest house, you’re probably going to pay top dollar.  The comps in the neighborhood are $500K and you’re willing to pay every penny of that just to get a home of your own.  Now you’re paying taxes, mortgage interest, insurance, utilities, repairs, lawn care, and of course you shouldn’t forget that nice fat fee you paid the agent.

 

But if you were a little more patient, you could ask your agent to show you some short sale properties.  Properties where the owner might be under water, and the bank might be willing to take 60% of what’s owed….and probably 60% of its actual value. If you buy a house at a 40% discount, you also pay a lower agent fee by default. Your mortgage is lower too so you pay less interest.  And because you bought the house on sale, you can probably turn around at any point and sell it for a sizeable profit.

 

Know Your Number

You have to be clear on what the value of an asset is in relation to the price you pay for it.  That’s the biggest factor in deciding whether you’re making a solid investment. There are a couple of ways to do this.They are crucial in determining sure thing investments.

 

The first way is to look at historical prices.  This is really the only way to value something that has no cash flow characteristics.  Gold for example is a lump of shiny metal.  You can rub it, talk nice to it, and sing it songs……it still won’t do anything.  Its only value is the sentiment of the market.  But gold does have a long track record which can be taken into account when deciding whether or not to purchase.  If you’re planning on turning around and selling it for a profit immediately you can compare your purchase price to the fair market value.   If you plan to hold for the long term, then you might want to compare your current price to a long term moving average.

 

The next way to value an investment is to compare the purchase price to the expected cash flow that will be generated out of the investment.  Real Estate Investors look at the Cap Rates of Rental Properties. Bond and Stock Investors look for interest and dividend yields.  Businesses can be valued by their projected earnings going into the future.  From that point, you have to ask yourself how quickly you want to get your money off the table?  20 years? 10 years?  2 years?  That’s what will determine your purchase price.

 

In either case, it’s about buying assets on sale.  Getting the best bang for your buck regardless of what the investment in. Plain and simple. It is one way of getting sure thing investments.

 

If you need help figuring out how to buy assets on sale, take a look at some of our free investment strategies here.

 

About The Author

herbertkoehler

I am a college drop out who found my passion as an investor. I love the many facets of finance, investing, and business. But even more than that, I love sharing what I learn with others.

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