When you say “conservative investing,” most people think of putting their money in the largest, most stable, and least risky businesses and assets. This keeps the principal safe. Even though some industries are called “conservative,” buying large, well-known companies is not a good way to invest conservatively. Instead, this point of view makes it harder to tell the difference between being conservative and acting normally.
Conservative investing is not a low-risk, low-return strategy if it is understood and done right. Investors need to know two definitions to know how to invest conservatively.
A conservative investment gives you the best chance of keeping your money's buying power with the least risk. Conservative investing means knowing what a conservative investment means before taking the steps you need to take to determine if a certain investment is conservative.
Many investors don't invest conservatively because they think that if they buy any security that could be considered a conservative investment, those who are investing conservatively. In other words, these investors pay the most attention to the first meaning.
This is a limited and expensive point of view. For a conservative investment strategy to work, you need to know what a conservative investment is, more importantly, how to figure out whether something is a conservative investment.
Characteristics of a Safe Investment
Suppose investors already know what a conservative investment is based on the first definition. In that case, they need to know what makes an investment conservative, and that's where the second meaning comes in. Investors can find a conservative investment in one of three main ways.
The Safety Factor
Any safe investment should be able to weather storms in the market better than the rest. For this to happen, certain things must stand out. First, a business's cost of production should be low. The main benefit of being a low-cost producer is that when the industry has a bad year, there is still a chance to make money or report a smaller net loss.
Second, a business needs a strong department for research and marketing. A company that can't keep up with market changes and trends and stays competitive is doomed in the long run. Lastly, management should know how to handle money. By doing this, it will learn about things like the cost per unit of production, how to get the most out of the money it invests, and other important parts of running a business.
The People Factor
This is a characteristic of a conservative investment that is pretty clear. But remember that excellent people can only help a business if it has shown the above signs of quality. When a management team known for being smart takes over a business known for having bad business sense, the business's reputation stays the same.
One or two people with a lot of talent can help a small business do well. But as a business grows, all its employees must be counted if it wants to succeed and stay a safe investment.
Descriptions of the Business
This third quality takes more work on the part of investors, but it is worth it. The goal is to determine what benefits might stop the business from growing and making more money, even though the first two conditions have been met.
One important thing to think about is how competitive the industry is. Even the best companies can be hurt by too many competitors or how easy it is for new ones to get in.
The possibility of too much regulation could also change the game. Even if a company meets the first two obvious requirements for a conservative investment, you must always remember this third requirement.
Those Who Don't Create It and Those Who Do
Companies like Coca-Cola (KO), Walmart (WMT), and Johnson & Johnson are great examples of companies that pass the test (JNJ). These companies have shown over and over again how good their franchises are.
Even better, these companies will likely continue to have many good things going for them. Coke only has to deal with Pepsi as a rival. Also, entrepreneurs probably aren't sitting in their garages thinking about starting the next big soft drink company.
Most stores, except for Target, should be worried about Walmart's existence and continued success. It went out of business, and Walmart had much to do with that. Once a passing business has been found, the stock price is only important to determine how much money was made.
Investing conservatively means you don't just look for big, well-known companies. You also go through a process that helps determine why a certain company is a good investment. Moreover, as the titles of conservative investment firms above demonstrate, being a conservative investor may lead to a few of the market's most consistent and respectable returns.