• Arne

How to identify a great investment

Identifying outstanding businesses is crucial. However, a great is not only about the quality of the business but also about the price you pay for it. If you want to be a successful investor you need to learn how to do both: identifying promising business and purchase them at a reasonable price.

Would you ever put your money in a company which has a poor future outlook, an obscure business model or an insincere management? Hopefully not. Would you ever put a huge fraction of your money into something you have do not fully understand? Hopefully not. Unfortunately, there are many people calling themselves investors while gambling their money on businesses they don't understand.

How to identify a great business?

Identifying a great business is not difficult at all. We are dealing with great examples of such on a daily basis. For instance, we use AirPods for our morning run, we enjoy a Coke at lunch or googling the whole world. All such companies are only some few examples for outstanding businesses. What they all have in common is an easy to understand business model, a reliable customer base, a great brand and awesome products or services. Just pay attention to your environment and you can easily identify great businesses.

The price determines a great investment.

Unfortunately, finding a great business alone does not make it a successful investment. What is true for investing in a business is also true when purchasing a single product or service; it is only worth investing if the price is fair compared to the quality you get. For instance, if you are a common stock investor you need to have a reasonable price in mind for the stock you buy. This price must be determined by future outlook of the business and include a margin of safety. If you purchase a great company for a price that is too high your investment will never pay off.

That being said, as a great investor you should always seek for a great business you truly understand and believe in, and that is sold at a reasonable price. I wrote another article about how to calculate the intrinsic value of a company.