Investing in Philippines: Investing Word of the Day: Return


Saturday, January 28, 2012

Investing Word of the Day: Return

We talked about inflation, that "thing" that eats up the value of your money, and how can it really affect your financial capability. That is why we invest in order to combat it. There are so many ways to fight it and eventually outrun it so that you can relax and sit back.

One important word you have to understand is the word RETURN.

RETURN is what you get from your investment over a period of time. Knowing this, how can we use this to fight inflation?

In my beloved girlfriend's, Kris Diane Domingo, blog moneylifeblood she mentioned a concept about return in our small business back in her home in San Mateo. We opened a "sari-sari" store and some of her points really explained the usefulness of knowing your return. 

Return can be computed by expressing it in terms of a percentage. With that we can now compare it with the rate of inflation thereby we have a barometer to check if we are really making it, beating inflation, or just making it eat more the value of our money. As my Krissy mentioned, selling cheap seems like losing because we only get a small return but if we get that small return many times or faster it would be better than waiting for the return on a longer time period. Just like Chinese merchants they may be selling at cheap or near cost prices but the secret to it is to earn that amount faster thereby increasing the rate of return.

So for us in the stock trade it would be foolish to keep putting all money in a long term but we should allocate our funds to both long term and short term investments to fight inflation. We can continue accumulating shares of blue chips in small portions while earning more buying stocks for short term investments and re-investing the returns either to accumulate more of blue chips or expand our portfolio of stocks that gives good returns at a shorter period of time.

The faster you get your return on your investment the earlier you could sit back and enjoy your blessings with your loved ones and to all the people you really care for. So invest in different investment vehicles that give returns faster to fight inflation; know your rate of return.

Now how do you compute your rate of return? Simply divide your net profit by the cost of your investment. 

Rate of Return = Profit/Cost 

or to extend the equation

Rate of Return = (Earnings-Cost)/Cost

This will be your starting point. 

If your Rate of Return is negative or it is not even above the inflation rate you could do three things to improve it.
  • Increase your Earnings and maintain your cost
  • Decrease your cost and maintain your earnings
  • Or do both: Increase earnings and Decrease Cost

It may be impossible at the beginning but with all the free resources out there we can fight inflation. 

Know your Rate of Return. 


Dennis The Menace said...

I would like to take a a moment to talk abot a very simple method of picking value stocks that could very well be the most important element when it comes to value investing. I don't believe that warren buffett could have been the great value investor that he is unless he was a heavy user of this method. Bear in mind I would not write something that I cannot back up believe me. I will give an example of a company of really decent quality that I consider really undervalued. The company is Bunge Limited symbol {BG} engages in the agriculture and food businesses worldwide. The stock currently trades around 59 dollars a share. I think the stock could easily get to 450 dollars a share over the next five years. Yes you heard it right four hundred and fifty dollars a share. Assuming their are not stock splits. And what do I base this on. If the companies profit margin expands from around 1.75% to 4% over the next five years and if the sales of the company expand from 54 billion to 85 billion thats growth of about 7 or 8 percent a year and if the companies stock than trades at a price earnings ratio of about 20. That would put the price of the stock at 450 dollars a share. It could even be more than 450 dollars a share if you reinvest your dividends the company pays a dividend also if the company does a share buyback this could increase the value of the stock even more. Keep in mind that their are stocks that are popular that trade at much higher price earnings ratios than 20 times earnings one example is whole foods market it currently trades at 35 times earnings. Another example is Mcdonald's it trades at 20 times earnings. Also keep in mind that bunge is a company of really decent quality not at all a high risk stock. It has the potential to leave a company like Mcdonald's in the dust. I understand your skepticsm if you are reading this but go to any stock broker or financial planner CPA that knows how to value stocks and they will confirm everything that Im writing here.

Unknown said...

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