What to do when someone wants you to invest into a Sure Thing

What to do when your friend wants you to invest into a sure thing? We all are looking to increase our net worth, we do so by working, investing and even starting our own businesses.  This detailed paper is focused on determining the risk factors when you are investing into a company referred by someone or a company you think you can make lots of money from.  Normal referrals come the normal way, one of your mate wants you to call him back urgently. He is buzzing with excitement and can’t wait to see you in person. He has found a sure way to make money from a company that is about to release the next big thing, it is going to be so big, you are both going to be overnight millionaires.  How did he found out about this wonderful opportunity, well it’s a big secret, either he can’t tell you how or one of his mates works in a company and has this inside knowledge.  Since your friend is someone who actively day trades and doesn’t want you to miss out on this opportunity, he guarantees you are to double or even triple your money overnight. You must act now because once the news breaks, the price will jump dramatically. He tells you he is investing $100,000 of his own money and you should also do the same with as much as you can.  Since he is going all in, you have to decide now.  What do you do, do you take his word for it and act now?

Instructions

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    First, whenever an opportunity comes by, if you have the time, you should look into it. I have seen way too many people pass on good opportunities not because they didn’t believe in it but they were afraid to lose.  Those who lost were the ones who jumped at the so called opportunity but without any due diligence.

    First thing you have to remember, whenever you make an investment into anything, it comes with risks and rewards.  In short time investment, there is a direct co-relation between high risk high rewards. This is why these riskiest bets, these out of the blue short-term investments in yoyo stock market, can in some cases bring the greatest rewards, but on the flip side, be on the wrong side and you will also see stunning losses. The truth is whenever a friend tells you it’s a sure thing and even if you believe it, if you don’t look into it properly, your friend's "sure thing" is anything but, and you need to understand how different risk factors can impact your financial future for the short and long term.

    I have seen it first hand, even the most conservative investment, such as an FDIC-insured certificate of deposit (CD), which are always around, come with a degree of risk. A friend of mine did just that, she put some money in CD, the interest rate on the CD turned out to be too low due to higher inflation and she lost good share of her money.

    What do smart investors do, how do they valuate opportunities, do they jump on these act now or lose the deal forever kind of bets?  To start off with; people who are smart investors, try to manage their risk and they do this by investing in a diverse portfolio of stocks, bonds, CDs and other financial instruments. They either do this through well established  fully managed mutual fund or they do it be actively following the markets and doing the investments themselves.  Some follow the moves and investing strategies of people like warren Buffett and buy into consumer monopolies.  I call them hands-on investors who buy or sell stocks in individual companies, either through a broker they have worked with over period of time or they use an online trading Web site. If you just heard about a sure bet or you're thinking about investing in any company instead of betting on a diversified mutual fund, don’t just go with your gut instincts. You must take the time to analyse the company fully as fast as you can.  There are specific risk factors that come with every investment and every company, once you understand them, your decisions will be driven by what the numbers tell you rather than the risk of losing on a “sure thing".

    First rule is to always start by researching some basic questions about the company: Two ways to do this:

    1. Primary research : you make the calls yourself, talk to the customers, suppliers, managers etc.
    2. Secondary research : you use the information available in the market, research conducted by others. The experts on Wall street called  "Wall Street analysts” what do they expect from the company's next earnings report or what reports did they publish on last years earnings? Look at past years, as far as you can go and see how does the company's historic stock price compare with market indexes like the Dow Jones Industrial Average? How did the company do when recession came about? What about the management, are they in it for long haul or they slip in and out, Is any member of the top management team under any sort of investigation? What are the execs doing with their stock, are they holding on or offloading it?

    As you can see, there are lots of different things you can look at and research.  To make it easy on you, I have put together a list of significant risk factors that have caused me to make money or lose money, in other words, these factors can cause an investment to sink or soar. You must remember, there's no way to remove all of the risk of investing — even Warren Buffett had losing investments — but by doing your homework correctly, you can identify key trends to see what is going on with the company and invest with greater confidence instead of “sure thing” gut feelings. To get you going on the right foot, first look at the industry as a whole. If the industry is growing fast, chances are high the company as long as it has a good management, should also grow.



    This is the step number one : When you are evaluating the risk or rewards of of investing in a particular company, start with the big picture, start with the entire industry. Although every company is unique and has it’s own strengths and weaknesses, but individual success also depends on opportunities and threats trends within the business sector as a whole. Let's say you're thinking about investing in a security company. You might notice newspaper articles reporting a decreased demand for construction site security, due to recession but increased demand for consumer related manpower security. To decrease your risks, you would want to invest in a company that provides consumer related security.

    Or you might want to invest in auto industry and see the trend of more and more people buying fuel-efficient vehicles rather than big 4 x 4’s. It clearly says if you must invest in auto industry,  invest in a car company that designs lightweight or hybrid vehicles.
    When you look at the sector as a whole, it can be as broad or as specific as you want. You can look for data and analysis of the entire consumer electronics sector (you will find penalty of it) or you can home in on mobile phones like iPhone, Samsung and others. Mobile sector is covered by "trade" publications and Web sites  such as The Droid Review.com — that goes into great detail about industry news, sales figures and trends for Android related devices and there are loads of other sites, which cover IOS side of things.
    You can also look at the big well known major newspapers like The Wall Street Journal, Financial times, The New York Times and if you are in the UK, The Guardian, Times etc. they all have fully covered business section, they publish in-depth coverage of business trends and industry performance on daily basis. These are the historical way of looking at things, the real time publishing has taken the news to a whole new level. These social media sites are littered with Stock analysts and "experts" of varying qualifications who are all tweeting, liking and sharing content in millions.  A new plane crash will be discovered way before on these sites compared to the traditional newspapers.  If you own the stock of that airline company, you know it is about to nosedive and you must sell it fast.
    It is also important to look for monopolies in the sector. For example, if you are evaluating the performance of an entire business sector, look at, if it is dominated by one or two major players or no one really has majority of the market. If you look at property market in the UK, it is dominated by RightMove and Zoopla but a new player Houser.co.uk is bridging the gap fast.

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    After you have fully looked into industry as a whole, the next logical step is to evaluate the competition.
    Understanding the competitive field will allow you to see things much better. We all know companies do not exist in a bubble but if you don’t do the work to understand the standing of the competition, you may live to regret it. The competition is driven by the product of both consumer demand and their competitive environment. This should not come as surprise, the most successful company is the one that grabs the biggest piece of the pie, which means it must have the large market share compared to others.

     

    Finding the company with the biggest market-share in most industries is easy but the company with the biggest market may not be the best investment. You must be scratching your head, why is that?
    There is a direct correlation with amount of money you will make and the growth of the company you invested in.  This clearly tells you, If you want to make money, the company you invested in must grow.  You buy a stock of company at $10, only way you will make money is if this stock grows more than $10 you paid for.  Market share is one of the key factor, which influence a stock price.  The current market leader may have reached a certain growth but a competitor someone new might challenge the entire industry. In the late nineties there were many search engine giants like Excite, Infoseek, Goto, Yahoo but than came these two people in their garage who started Google. It did not have hardly any marketshare but today, it the largest search engine in the world.  Those who were investors in other search engines, from them, those who also invested in Google are the ones who made big money.  So rather than looking for the company with the biggest market share at the moment, the savvy investor is trained to look for the company with the greatest potential to increase its market share in the future.

     

    More to come soon .....

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