Investing in conservative top-line stocks may not have the appeal of a high-tech investment, but it can still be very rewarding, as good quality stocks have outperformed other investment classes in the long run.
Historically, investing in stocks has generated returns, over time, of 11 to 15 percent per year, depending on how aggressive it is. Stocks outperform other investments as they carry higher risk.
Investors in stocks are at the bottom of the business “food chain.” First, companies must pay their employees and suppliers. So they pay their bondholders. After that come the preferred shareholders. Companies have an obligation to pay all of these stakeholders first, and if any money remains, shareholders are paid through dividends or undistributed earnings. Sometimes there is a lot of money left for shareholders and in other cases not. Investing in stocks is therefore risky because investors never know exactly what they will get for their investment.
What are the attractions of front-line stocks? 1. Excellent long-term rates of return.
2. Unlike mutual funds, another relatively safe long-term investment category, there are no ongoing fees.
3. You become a business owner.
So what about the benefits? What about the risks? 1. Some investors cannot tolerate both the risk associated with investing in the stock market and the risk associated with investing in a company. Not all blue tiles are the same.
2. If you don’t have the time and skills to identify a good quality company at a fair price, don’t invest directly. Rather, you should consider a good mutual fund.
Selecting a front-line company is only part of the battle, the other is determining the appropriate price. Theoretically, the value of a share is the present value of all future cash flows discounted at the appropriate discount rate. However, like most theoretical answers, this does not fully explain reality. In fact, the supply and demand for a share determines the daily price of the share and the demand for a share will rise or fall depending on the prospects of a company. Therefore, stock prices are driven by investors’ expectations for a company; the more favorable the expectations, the better the share price. In short, the stock market is a voting machine, and most of the time votes based on investors’ fear or greed, not on their rational valuations of value. Stock prices can fluctuate widely in the short term, but eventually converge to their long-term intrinsic value.
Investors should look for good companies with high expectations that have not yet been incorporated into the price of a share.