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Don't Lose Money

MIndyke's picture

By MIndyke - Posted on 23 June 2010

Protecting against losses is highly recommended if you want to become a successful investor. One way to measure a company’s worth is to examine its margin of safety, the difference between the stock price and intrinsic value of the business. Intrinsic value is a concept that varies from business to business, where value can be measured differently. Investors commonly look at financial statements and search for the numbers that matter most. At the same time, it is advised to recognize statistics that are less important and whether they detract from the company’s worth. When you want to determine the book value of a business, you check out the total assets on the balance sheet. But if the assets include categories like intangible assets and goodwill, you want to subtract those numbers from the total assets because they are not physical assets that can be measured accurately.

Another key benchmark of evaluating your investments is to estimate the company’s future cash-flow generating ability. Without sufficient cash flow, businesses will not meet its fixed and variable costs and if it were to declare bankruptcy in the future, investors may not get their money back. Certain businesses have the ability to generate cash flow faster than others. In a money-based industry like banking, cash can be hard to come by because of the large amount in loans it grants to customers, who may not have the means to pay it back when it comes due. So if a company’s cash-flow generating ability was an investor’s priority, Citibank may be a risky investment. A discount retailer is one type of business that can generate high cash flow because they sell necessities at low cost and in mass quantities. Since this is an attractive way of luring customers, the retailer would receive increased business, thereby bringing increased cash flow for the business. An investor considering Wal-Mart or Costco would score big if considering cash-flow generating ability.

Investors should be forewarned that the market is their own worst enemy. Unexpected and volatile market fluctuations will wreak havoc with your investments. In a time where the stock market is rising steadily, the market is your friend. But if the market drops by a large percentage frequently on any single day, the market is your enemy. During the economic recession of the last two years, the latter has been true on many days and investors have had to become smarter and more creative about mitigating losses and getting the best returns.

Avoid these types of investments to increase the chances you keep your money:

Low-rated bonds (a.k.a. Junk Bonds)

  • These investments carry a high rate of default, increasing the likelihood that the company issuing the bonds will not pay its investors on time or at all, due to lack of liquidity.

Stocks of highly leveraged companies

  • Firms with high leverage borrow lots of money to pay off debt, thereby creating more debt. The company may also depend on money made through equity accounts. These types of companies eventually run out of cash, default on its liabilities, and go bankrupt. 

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