A Guideline for Investing
I want to provide you a concise draft of my understanding of successful investing:
1. Understand Basic Accounting
Build an interest in basic accounting so that you can read annual reports easily. In fact, they can be requested free of charge from any investor relations department of a publicly traded company. Order a few reports of companies you have interest in and read them (especially the first half up until the financial statements section). Having this foundation is of great benefit to manage your own company, or understanding the company you wish to invest in.
2. Circle of Competence
Move within your circle of competence. I know that my own circle of competence is rather limited, thus I only want to deal with two types of businesses which I can understand inside out: Companies which I have either created myself, or companies which I wished I had created myself. You can buy shares of stock for the latter ones and piggy-back on their growth.
There has to be a degree of predictability to every investment opportunity with regards to future cash-flows. You also need to have certainty that the cash-flows have growth potential. If a positive income does not appear to be foreseeable in the near future, look elsewhere.
4. Return on Investment
A return on investment has to make economic sense. If it is too marginal, you risk a loss for a given period if extrinsic conditions affect the company adversely. There needs to be a playground for growth instead of getting stifled by too tight budgets in the first place.
5. Allocating Money
Invest within your means. It is wise to retain some capital at all times to be ready for a new investment once an opportunity arises.