How To Be a Conservative Investor
To be an investor is one thing but to be a conservative investor is something else all together. The conservative individual is traditional and likes to stick with the tried and true. As well he/she likes stability and is more in favor of gradual development as opposed to abrupt change.
When the word conservative is used in relation to investing the vast majority of individuals believe that it is all about placing your money into the most stable and largest enterprises around. This then guarantees that the principal will remain as safe as possible. If the capital that has been invested in this case appreciates then this is even better for the investor, it is more than trading a stock .
While many enterprises are described as being conservative in their investing practices, such as utilities for example, it is important to note that simply purchasing a big and well known company does not automatically make the investment diversification approach successful from a conservative point of view. There is a difference between acting in a conservative manner and behaving in a conventional manner.
Conservative Investment vs. Conservative Investing
A conservative investment is not the same as conservative investing. Many people mix up the two and think that the terms are interchangeable but they are not. It is worth noting that conservative investing is not a strategy that is low in risk and low in return. In order to be able to invest conservatively you must know the difference between a conservative investment and conservative investing.
A conservative investment is one in which the greatest likelihood of retaining the buying power of capital comes with the smallest degree of risk. On the other hand, conservative investing is understanding what a conservative investment is and what it entails. From there it is following a particular course of action that must be put into play in order to ascertain whether or not the investment you are considering is a conservative one or not.
Many investors make errors when it comes to investing conservatively because they assume incorrectly that any security that is deemed a conservative investment makes them conservative investors. To put this in even simpler language, these types of investors focus their attention on the first definition (the conservative investment) and disregard the second.
Taking this viewpoint is very limiting in nature and it is also costly in a monetary way. A conservative investment approach that is successful necessitates that the investor thoroughly understand what a conservative investment is but even more significantly, understand what the suitable approach is to be able to identify what makes a conservative investment such and what does not make a conservative investment.
A Closer Look at a Conservative Investment
If an investor knows what qualifies an investment to be a conservative one then the next step is to be aware of what the characteristics of a conservative investment are. This is where the definition and discussion of conservative investing comes into play. When identifying a conservative investment there are three categories that an investor must examine. They include the safety factor, the people factor and the characteristics of the business. Let us explore at one of these now.
The Safety Factor
A conservative investment must be able to weather the rise and fall of the financial markets better than all of the rest. In order for it to do this there are certain types of characteristics that must figure prominently. One of the most significant is that the business or company should have production that is low in cost. The greatest advantage of being a low-cost producer is that when there is a bad year financially it is still possible that a profit can be made and that a smaller net loss will be reported and be very much available.
It is also essential that a company have a research and marketing department that is strong and very aware of what is going on. Any company that is not able to compete by staying on top of the changes in the markets and being aware of the current trends will fail, perhaps not in the short-term but definitely in the long-term.
The management of a company needs to have as much financial skill as possible; the more that they have the more it works in their favor. Possessing much skill in this area means that they are well acquainted with items such as maximizing return on investment capital, per unit cost of production and other necessary elements of the success of a business.
The People Factor
To qualify as a conservative investment the people factor plays an integral role as well. It is important however that the excellence of the people in a company does not come into play until the business has been able to demonstrate that it possesses all of the signs that nave been described previously in the safety factor.
A company that is small can still become successful as long as it is run by one or two individuals who are very talented and are focused and know exactly what they are doing. However as time passes and the company grows the people within it must be counted if the business is to become even stronger and more successful. This will allow it to continue to be a conservative investment.
Characteristics of the Business
There is yet a third quality of a conservative investment to discuss. It is that of the characteristics of the business. This requires more work for the investor but it is work that is well worth it. The goal for investors is to decide what the advantages and disadvantages are that may inhibit the business from growing and from bringing in greater profits even if the first two conditions- the safety factor and the people factor- are met.
One thing that all investors must think about is the “competitive landscape of the business.” How many competitors a company has and/or how simply and easily new competition can enter the picture can affect any business. The potential in this regard for excessive regulation can alter circumstances which can make a difference. When evaluating a conservative investment you should determine whether it first satisfies the safety factor, as well as the people factor. Once those conditions are as they should be then you should consider the third condition which is the characteristics of the business.
Some businesses pass the conservative investment test while others unfortunately do not. It is not always how how often a stock splits, although many beginners are attracted by splits . Some examples of well-known companies that have passed and continue to thrive include Coca-Cola, Johnson & Johnson and Wal-Mart. All of these popular companies which are very well-known have shown time and time again that their franchises are very strong and grow stronger with time. This has a great deal to do stock prices and the value behind them.