The investment equation

Investing is all about laying out money now to receive more back in the future.

So the key questions are - how certain are you that you'll get your money back at all? If you do get your capital back, what sort of return are you likely to receive and when are you likely to receive it? And, finally, how do alternative investments stack up against the one you're considering?

This can be termed the investment equation. And in this article we're going to discuss the first question. Over the next few issues we'll consider the others.

Return of capital

Before worrying about return on your capital, worry about return of your capital. So, let's consider the first question - what are the chances of getting your money back over time?

Well, if you're concerned about protection and growth of your capital over the long term, the quality of the company's underlying business and assets should be your main consideration.

That sounds like straightforward advice but, for some reason, it's logic that escapes many academics and professional fund managers.

Many of them look to the share price to assess risk (beta). We think this is dead wrong. For example, the value of companies like SecureNet and Great Southern Plantations are certainly not changing as fast as their share prices. Their main assets, cash and land respectively have quite stable values but, strangely, their share prices do not reflect this fact.

Visit The Intelligent Investor for the rest of this article on the Investment equation and to find out more on investment definitions.