| Buying shares is both exhilarating and frightening at | | | | which is obviously a lot less appealing from an |
| the same time. It is frightening because you are | | | | investment point of view. |
| putting your hard-earned money at stake, but it is | | | | The general rule is to look for companies whose |
| also exciting because you know that if your | | | | market capitalisation is less than 15 times net profits, |
| investment is a good one, it could yield substantial | | | | although I personally prefer to seek out companies |
| profits. However if you want to make consistently | | | | whose market capitalisation is less than 10 times net |
| profitable investments there are two questions you | | | | profits, particularly at the moment when share prices |
| should always ask yourself. | | | | are low. |
| Firstly when you find a company that you may be | | | | The second question you should ask yourself before |
| interested in investing in, you should pretend that | | | | investing in a company is whether you would be |
| you're a billionaire and you're actually taking over the | | | | happy to hold on to shares in this company for the |
| company yourself. This is a tip I picked up from | | | | next ten years or so. You have to ask yourself |
| Robbie Burns, who is arguably one of the most | | | | whether profits (and dividends) will continue to grow |
| successful investors in the UK. | | | | in the coming years or will the company be |
| It works a treat because what this does is it enables | | | | overtaken by competitors. You ideally want to look |
| you to effectively value a company and therefore | | | | at market-leading companies who are at the |
| decide if it's cheap enough to invest in at it's current | | | | forefront of their industry and who have a long track |
| price. You can do this by first of all identifying the | | | | record of increasing both earnings and dividends. |
| market capitalisation of the company and then | | | | So to sum up, if you want to make profitable share |
| looking at the net profits for the year (and | | | | purchases, then you won't go far wrong by asking |
| projections for future years). | | | | yourself these two key questions before investing in |
| For example if the profits for the year are $50m and | | | | a particular company: |
| the market capitalisation is $500m then this is a solid | | | | 1. If I was a billionaire and money was no object, |
| investment because it would take just ten years to | | | | would I be prepared to take over the company |
| recoup your initial investment (and even less if you | | | | based on it's current market capitalisation? |
| factor in any growth in profits). However if the | | | | 2. Am I prepared to hold on to shares in this |
| market capitalisation is currently $1000m then it | | | | company for the next ten years or so? |
| would take twenty years to recoup your investment | | | | |