By Syed Rahman, Jan 3 2013 01:53PM
Can you really make a million pounds or more through investing? Is it that easy? What if you lose your initial investment? Well, the answer is, that, yes, anyone, yes anyone, even you can make a £1m or much more by investing but it requires some knowledge, patience and most of all action. And the good news is that many people have already made it.
On Channel 4 TV live in front of millions of people I was asked to recommend a share of a good company to invest in. The company I recommended was called Arm Holdings. The share price of that stock went from £4 to £56, which means if you had invested £10,000 you could have made an amazing £140,000 in a year. A 100,000 investment would have made you an incredible £1.4 million pounds in a year.
That company now grown to become one of the largest and most successful companies in the world and is in the FTSE 100, a list of the Top 100 companies in the UK. According to the July 4th 2010 issue of the Sunday Times. Arm Holdings the company I chose now has a market capitalisation of £3,560 million pounds which means it is now worth a staggering £3.5 billion pounds.
So how can you become successful in the field of investing? Well investing is like learning to drive a car, or swim or anything else for that matter. If you were learning to drive a car would you ask someone who couldn’t drive or would you ask an expert instructor?
The same logic should be used in investing. If you learn from the experts you have a much better chance in succeeding. But who are the experts? If they’re so good why has the stock market gone down? Why haven’t your unit trusts or pension funds done well?
Over the long term the stock market is a better investment vehicle than most other forms of investment. Why is this? This is because we all need to buy goods and services for our lifestyle and a lot of the companies that provide them are listed on the stock market. So, as millions of customers buy goods and services, the sales of these companies increase and so do their profits and therefore the share price of these companies also increases overtime. The richest man in the world as we all know is Bill Gates. Why is he so rich? It is because he owns millions and millions of shares in Microsoft which is one of the most successful and valuable companies in the world. Microsoft also has over 5,000 dollar millionaires and two other billionaires working for it and they all became rich by owning shares in Microsoft. If you had bought £10,000 worth of shares in Microsoft back in 1986 then you too would now be a millionaire.
The 2nd richest man in the world is Warren Buffet and he is also the world’s most successful investor. According to the 2010 Sunday Times Rich List he is worth an incredible £29.9bn. He started investing in 1956 with only £60. Now if he can make £29,900 million or almost £30 billion, you might be able to make 10% of this, or even just 1% of this, which still is an amazing £299 million and is more then enough money to turn almost all of your dreams into reality. You would also become the top 241st richest person in the UK and twice as rich as David and Victoria Beckham. You would also be 2nd richest Dragon if you were on BBC2’s famous programme Dragons Den and be far richer then Peter Jones who in the Sunday Times 2010 rich list is worth £220m, Theo Paphitis worth £160m, James Caan worth £85m and Deborah Meaden who is worth £40m.
This is enough money to buy your own mansion, better then Posh and Beck’s your own desert island paradise, your own Ferrari or Bentley, even your own helicopter, private jet, a private yacht and number of beautiful homes all over the world. Even just 0.1% of Warren Buffet’s huge £29,900m of wealth is still almost 30 million pounds and more money than most lottery winners ever win.
If you can get all this through investing then why doesn’t everyone invest? The answer is most people in the UK are investing, either:
Directly because they have bought or been given shares or share options in companies they work for or they have bought shares in large government privatisations like British Gas, BT, British Airways and many others.
Or indirectly through pensions and investment plans.
As you can see almost all of us are directly or indirectly investing, but the question is, how are our investments performing and can they do better?
Are you on your way to making your first £1m? Or first £100m or more? If you are, then I congratulate you. If not, then I suggest we learn how to drive i.e. start learning from the experts, who have already made their millions, people like Warren Buffet, Jim Slater and Sir John Templeton.
If you really want to make your millions then the first thing do as with any great journey is to have a plan. After all if you wanted to drive from London to Germany you world need to plan your journey. The better planning and preparation you do at the beginning, the easier and smoother your journey will be and you can arrive at your destination on time or even earlier while enjoying the journey and having some fun as well.
To begin our planning we need a note pad or piece of paper and a pen. Next, let’s write down how much money we want to make, for example £1m which is our destination. How far are we from our destination? This means we need to know what our net worth is or our Personal Balance sheet. This is calculated by adding up all our assets including savings investments or shares we own and if we own a house our equity in the house. Then taking away our debts which are loans, credits cards, mortgages and any other debts we may have will give us our net worth. For example if our assets are worth £200,000 and our debts are £100,000 then our net worth is £100,000 which means to reach our destination we need to make another £900,000.
The next sage is to determine how much money we have to invest and therefore we need to write down our Personal Cash flow statement. This is done by first listing all our incomes which includes salary, any bank interest, dividends from shares and any other cash benefits which we may receive. Next we need to list all our costs this includes all home bills like food, gas, electric, mortgage, any credit card bills, your car bills and any other payments that you regularly make. If you take our monthly income, for example £5,000 away from our monthly costs for example £4,000 then our NET Positive Cashflow is £1,000.
This amount can now be used to save and invest and reach our £1m destination. We next need to determine what is our financial strategy. This depends on our age, financial circumstances, personality and habits. The better our financial knowledge and habits and the earlier we start, the more money we can accumulate and the faster we can accumulate it. Warren Buffet started his investment partnership with $100, approximately £60 and after just thirteen years he had accumulated an amazing $25 million.
We can now start to develop our financial strategy. The younger we are the more time we have for our investments to grow and also the more risk we can take. I suggest a sensible strategy is to take our positive cashflow amount e.g. £1000, use 1/3 which is £333 of this to pay extra amounts to clear our loans and debts faster and therefore as our loans get paid, in the future we will have higher positive cashflow to invest. The next £333 of our positive cash flow amount should be to put into a savings account so that if you need money for an emergency, it is there. The remaining £334 can be used to invest in shares. If you have no debts and have savings already then most of this money can be used for investing.
Why do shares go up? Why does anything go up?
Well the simple answer is supply and demand. If more shares in a company are being bought then sold and there is more demand for a share then the price of that share will rise. If however, there is a bad news about a company and more people went to sell the shares or more shares are being sold then the price will drop.
Before we start investing we need to educate ourselves.
To get your education you can read newspapers like the Financial Times, go on the internet, watch the financial programmes on TV and read books and go on courses and seminars. Investing in shares and Day Trading are two different ways of making money. Day Trading is where you buy and sell shares daily, this can be very risky. Investing in shares over a longer period after doing your research has much less risk. If you can research and analyse a company properly and the company is a good company, then the shares of that company may go up and down daily but over a period of year or more the trend will probably be upwards.
A great example is dell. If you had invested £10,000 in Dell in 1988, within 10 years you would have made over £1m.
The first thing is to find out how to find good or great companies to invest in.
There are many things to look at and my suggestion is to start with a sector of the economy that you have some knowledge about, either because you work in it or because you have a hobby or social interest in it. For example if you work in IT then you may understand this sector better or if you love to shop or work in catering then you can start researching that sector. Your existing knowledge will give you an edge over all the other people who are also trying to find good companies to invest in, so you can buy the stock first and wait for it go up as everyone else follows you.
Some of the questions you should be asking yourself when choosing a company to invest in are:
• Which companies do I or my family and friends like doing business with?
• Which companies do I or my family and friends recommend or would recommend?
• A simpler question to ask yourself is where do I or my family and friends shop?
• Which restaurants do I or my family and friends go to?
• Which products and services do I like buying?
• What are the staff like at these places? Are they polite and courteous?
The reason you should be asking these questions is because if you and your family and friends are doing business with these companies and the shops and restaurants are always busy, the staff welcoming then the business should have good sales.
If you like you can find out which companies own these stores and restaurants then call their head office and ask for their annual accounts. When you get the annual accounts of the company you can verify if the sales of these companies have been increasing over the last few years.
As you can see, shopping of shares is like buying anything, food, clothes or even a car. The difference is to leave your emotions aside and think logically and most of all financially. This is more difficult than you think, as the stock market is driven by millions of people who can be emotionally driven by fear and greed. If you can think independently of the crowd then you can become rich.
When you go shopping what you look for? Bargains or where is there a sale on? The same thing happens in the stock market. When the stock market is down that’s when we should buy because the company share prices are at sale prices, when the prices go high we can sell, but you need to do some research to make sure that share is a real bargain.
The stock market is like any other market, it moves in economic cycles. In the 1990’s the price of technology, media and telecom shares, like internet shares went up in value. If you had bought shares in companies like Freeserve or QXL when they floated and sold them before April 2000, then you would have made a great return. But if you were too scared to invest or did invest but were too greedy thinking the value would just keep going up and then sold at the wrong time you would have lost a lot of money.
When you begin reading the company’s annual accounts you will start to get an idea of the company’s financial performance over the last few years. You need to pay special attention to the Director’s Report, Profit and Loss Account, Balance Sheet and Cashflow Statement. As you may remember when you were preparing your own Personal Cashflow Statement and Balance Sheet you were working out your Assets, Liabilities and Positive Cashflow.
A company also has Assets and Liabilities which will be shown in the Balance Sheet. Sometimes a company will have Net Assets where are worth significantly more than its market capitalisation (the value of the company on the stock market). If this is the case then another company may be interested in buying this company and this can increase the company’s share price.
Another important thing to look for is whether the company has been increasing its profits in the last few years because as the company’s profit’s increase so does it’s share price. We also need to see whether the company has strong cashflow and can easily service its liabilities. If it has cashflow problems or it’s not using its cash wisely then the share price can go down. A company should be able to service it short term liabilities and should not carry too much long term debt. Too much debt will drain cashflow and affect future growth and profitability.
We also need to consider what is happening in the economy and the industry sector. If interest rates increase, this can have adverse effects on the economy and the stock market. You should try to pick a company which is in a sector of the economy which is expanding.
A company’s success is due to many factors. One of the most important is management.
Does it have good, experienced and stable management?
Some of the most successful companies such as Microsoft, Walmart, Dell and WM Morrison have a history of long and stable management. These companies are run by excellent management who also have a very large stake in the company and therefore the short term and long term success of the company has a major financial impact on them.
As you can see it is possible to make your millions through investing if you do your research. It takes time, knowledge and action. It is also important to note that the price of shares can go down as well as up and past performance is no guarantee of future performance. I do not recommend that you buy any of the companies I have written about as they are only used as examples. It is sensible and prudent to peak to a qualified financial advisor so that you can save and invest wisely.
I suggest you first save and educate yourself before investing any of your money. Try to learn as much as you can about the company you want to invest in.
If you can find a company which has great profit potential because it has fantastic products and services, good sensible management and the market has not noticed yet, you could be investing your way to your first fortune.
Good Luck and Happy Investing