Is risk a trap?
So if you should buy something that will go up, how do you know?
There are a couple of approaches to this. First, you can buy something that you believe people will want more in the future, say gold, oil, or orange juice contract. You can buy something that you believe will be so spectacular in the future that people will be paying spectactular prices for that, say a work of art, or Apple stock.
These approaches have one catch. They are a speculation, because you expect the world to change in some way for that to happen. Change, actually had low probability through the past. Note that it looks different to you if you just finished reading a book on successful venture capital firm, or history of Silicon Valley. The hard truth is that venture capitalists are right maybe about in 1/10 of companies. How much better do you think you are going to be without access to all the info they have?
I did not know about this for a long time, but there is a little trick to this. The thing with gold, oil, orange juice, or art is that if you do not touch them, they make no money for you.
However, there are stocks that willpay you dividends even while nobody is interested in these stock. The stock might be boring, and not offer 100% return in two months, but the steady returns you get over time is important. Many of these companies also reinvest the earnings and operate in good markets with good management, so the dividends and value of the company slowly increases over time. Maybe other people notice, maybe not, but you are making more money with time you are holding them. If you choose well, the investment is quite safe.
To wrap up, this is how you know the stock will go up in value. Because the company is making good money, and there are good chances the company will be making even more money in the future if it stays on the same path. The thing is that things do not change that often, and many people make low risk money on that.
This is how I would explain value investing in a very simplified way, and I will be talking about details in future posts.
In bullandbearlist.com we build tools for regular people to search for such high potential companies. Please note that all investments entail risk and these are just my opinions, not a professional financial advice. I am not a professional financial advisor.