How to Find Great Companies to Invest In

How to Find Great Companies to Invest In.

Smart investors put their money in reputable companies and investigate new companies thoroughly before committing their money. By carefully considering the qualities of the companies you invest in and incorporating your own knowledge of the market, you can make informed decisions in the hopes of choosing stocks of good quality and value. Be aware, however, this is no small task. Mutual fund companies and the like dedicate entire teams of experts whose full-time jobs are to research and understand how to invest in companies. Be sure you have the time and inclination to do this yourself, as well as the willingness to take the risks of doing so.

Method 1 Buying What You Know.
1. Stay within your circle of competence. If you have a field of expertise, you may be best able to identify quality within that area. Experience can provide you with the insights you need to make more informed choices. For example, if you work in retail, you may be better positioned to determine if you should invest in companies like Walmart, Target, or Best Buy, than you are in evaluating the latest bio-tech company.
Having competence in a certain area doesn't have to come from workplace experience. If you're a techie who spends his time buying and reading about the latest gadgets, you can draw on the information you obtain to help you make decisions on how to invest in the technology sector.
2. Focus on a few industries or markets. These can be either your direct area of competence or other areas that you are interested in investing in. The important thing is to realize that you can't keep track of everything going on in the global economy. Large financial institutions have whole departments for doing this so don't think you can do it on your own. Instead, narrow your focus to include only a few key industries or markets.
This doesn't mean you should avoid focusing on individual companies. You should always investigate every company you plan to invest in individually.
3. Stay up to date on news within that industry. Examples of quality sources for this are online finance websites like Bloomberg and the Wall Street Journal. They'll give you up-to-date information on many of the goings-on in various sectors of the economy and the World. Again, focus your energy on a few key areas and become knowledgeable on the happenings in them. Look for things like trends, mergers, acquisitions, relevant legislation changes, and any global events that may affect your chosen market.
4. Plan ahead. Identify a company that you think stands to benefit from some change or trend in the market. Look ahead for when this change will take place and move around your money to prepare to invest in the company. For example, if you think that a new product being released by your favorite tech company is going to be a huge success, you may choose to invest in the company before the rest of the world realizes this and drives up the stock price.

Method 2 Investing in Companies with Competitive Advantages.
1. Understand competitive advantages. There are some companies that manage to be consistently profitable and successful in their industry over many years. These companies have succeeded in building a "moat" around them to keep their competitors away. This distance from their competitors is also known as a competitive advantage. Competitive advantages allow these companies to make money and retain customers more easily than others. In turn, these companies are able to provide greater value and return to their shareholders.
An investment in one of these companies allows you to participate in their competitive advantage. While they may not grow as quickly as smaller companies, they often can be less likely to fail in economic downturns and can provide consistent growth throughout the years to come.
Blue-chip stocks are examples of large, successful companies with competitive advantages. These companies have provided consistent growth or dividends over many years and are listed on large stock indexes.
2. Invest in trusted brands. Think Harley Davidson, Coke, BMW. These are brand names etched in the public mind as the best in their class. These companies can raise their prices on the strength of their brands, resulting in deeper profits.These companies are so well-known and essential that they are unlikely to lose a significant amount of customers to competitors.
3. Find companies with high switching costs. When was the last time you switched banks? Or cell phone providers? These services retain customers because switching between them is more time-consuming than it's worth. Companies that have high switching costs can be expected to hold on to their customers longer than companies that don't.
4. Search for economies of scale. Companies that are able to make products and sell them at much lower prices than their competition automatically attract customers -- lots of them -- as long as quality is not compromised. In a crowded market, this is generally the result of economies of scale, a phenomenon where a large company is able to experience lower production costs solely due to its size. Walmart and and Dell have perfected this concept to a science.
5. Invest in legal monopolies. Some companies are granted legal (if temporary) monopolies by the government. Large pharmaceutical companies and manufacturing companies with patents are able to bring a truly unique product to market. Companies that own copyrights, drilling rights, mining rights, and other forms of protected property are often the sole producer or service provider in their area. Thus, these companies can raise prices without fear of losing customers, resulting in higher profits.
Be sure to check how long the company's patent or usage rights are in effect. Some of these are temporary and when they go, there's a chance the company's profit will go with them.
6. Look for opportunities for easy growth. Some companies are easily scalable. That is, their products or services with the potential to network or add more users over time. Adobe has become the de facto standard in publishing; Microsoft's Excel has done the same in spreadsheets. eBay is a great example of a user network. Each additional user to the network costs the company virtually nothing. The additional revenues that come in as the network expands go straight to the bottom line.
For a more current example, consider Netflix. As a streaming service, they make more money for each subscriber, even as their costs remain virtually the same. That way, as they gain more users they will continue to grow in profitability, assuming they don't choose to increase costs significantly.

Method 3 Evaluating Company Performance and Valuation.
1. Check the quality of management. How competent is the management running the company? More importantly, how focused are they toward the company, customers, investors, and employees? In this age of rampant corporate greed, it's always a great idea to research the management of any company you're thinking of investing in. Newspaper and magazine articles are good places to get this information.
This doesn't just mean that management has provided good financial results recently. Rather, look for indications of other important qualities like responsiveness, adaptability, capacity for innovation, and organizational ability.
2. Watch for management changes. A good leader can successfully turn around a company that many consider to be a lost cause. Watch the news and financial reports for changes in management positions, especially CEOs. If you believe in the new CEO of a company, based on your research, you may choose to invest in that company. Here, you're essentially putting your faith in the person, not the company.
3. Avoid overvalued stocks. Even a great company can be overvalued. Learn to interpret financial statements and pick stocks with fundamental analysis to find companies the market has overvalued. Know that these companies may be some of the most buzzed-about and invested in companies around, but they are still overvalued and may experience drastic declines in price once their day in the spotlight is over.
One way to determine if a stock is overpriced is to examine its price-earnings-ratio. The price to earnings ratio can usually be found in the company's stock summary on financial websites. Generally, PE ratios are between 20-25, but this varies by industry.
To evaluate a company's PE ratio, search online for the average PE ratio in the company's industry. If the P/E ratio is over the industry average, the company could be overpriced in view of its earnings.
4. Buy undervalued stocks. Undervalued stocks are those that are trading at a lower value than their financial information would indicate. These may be companies that have only started to do well recently. In these cases, the market has not yet caught up with their newfound success. To identify stocks with room to grow in value, you can also use the price-earnings ratio mentioned above and look for companies with low PE ratios compared to the industry average.
You can also look for companies with a price-to-book-value of less than 2. The price-to-book ratio is the price of the company divided by the total value of its assets minus its liabilities and intangible assets. A low ratio may indicate that the company is relatively cheap.

FAQ.

Question : How can I know a company's management?
Answer : A company's stock prospectus will list its management personnel. For suggestions on researching company management, go here: Investopedia.com/articles/02/062602.asp.

Tips.
Start thinking about everyday companies in terms of this new framework.
Learn the basics of reading financial statements. Check the profitability of companies you're interested in. Check their debt position. See if they have been growing steadily.
Visit the company’s website and other financial websites that will give you insight into the stock.
While it may be advantageous to invest in companies you know, do not limit yourself to just one or two sectors of the economy. Try to research companies in a variety of sectors. Doing so further diversifies your portfolio to better insulate it from a downturn in a single sector or company.

Warnings.
Be aware of stock tips: Whether they come from someone you see on TV or someone you meet in person, these are more often not well-researched or are even based on someone's grandiose theory about getting rich quick. They may also be provided by salesmen paid to inflate a stock's price to allow a company to raise as much capital as possible.
Jumping into buying stocks in a company without doing thorough research can be a quick way to lose your money.
Investing always carries risk. Even if you do everything right, there's no guarantee that you'll make money.

April 07, 2020

There’s Enough Math in Finance Already. What’s Missing is Imagination

There’s Enough Math in Finance Already. What’s Missing is Imagination.

For some of us, it was Spock. For others, a humiliating performance as a pilgrim in the kindergarten musical.  For me, it was William Blake’s relentless (and beautiful) attacks on Reason. But everyone at some point encounters – and many of us swallow – the dangerous notion that creativity and calculation are irreconcilable enemies.

This perspective lives at the very heart of our school curricula from first grade through graduate school, as our talents are identified and we, complicit in the scheme, label ourselves ‘artistic’ or ‘sporty’ or ‘scientific.’ No doubt there are real, epigenetic differences in the way people think and see the world, but in epigenesis lies the key: Nature gives us talents, but nurture determines how we use them, and how mono or multidimensional our minds become.

Like many quants – the mathematicians whose equations shape high-stakes decision making on Wall Street – Emanuel Derman arrived on Wall Street with little knowledge of economic theory. Unlike many of his colleagues, though, he had a background in theoretical physics, a field in which imagination and mathematics are happy bedfellows. From 1990-2000, Derman led Goldman Sachs’ Quantitative Strategies group, presiding over the rise of mathematical modeling as the engine driving financial betting on Wall Street.

The nearly insurmountable challenge of mathematical modeling in finance, says Derman, author of the forthcoming Models.Behaving.Badly., is that you are trying to predict the future based the behavior of highly erratic variables – i.e. people. To forecast human behavior with some reasonable degree of accuracy, mathematical models need highly imaginative designers with a profound grasp of human psychology – oracles who can foresee shifts in the global financial landscape and predict people’s reactions to them. Such designers are rare indeed, if they exist at all.

Still, like weather forecasts, the best mathematical models can help us to make better decisions, so long as we keep in mind that their predictive power depends upon the creative vision of the people who designed them, and that it is always vulnerable to refutation by developments in the real world. In other words, so long as we control the tools, not the other way around.

What's the Significance?

Faulty financial models, and Wall Street's overreliance on them, certainly played a role in the collapse of 1998, whose ongoing repercussions are manifest in the demonstrations going on right now in New York City and nationwide. And there are other massive, underlying issues – greed, unequal distribution of opportunity – that bear significant responsibility and intense scrutiny, of course. But math is not to blame – it is a tool, like science, that when guided by imagination and human understanding can expand the scope of our vision. It can help us to peer, however dimly, into the future.

Math’s not to blame, but a religious reverence for mathematical objectivity might be. We are susceptible to a modern-day form of idol worship whereby the sophistication of our technology and data-crunching power sometimes dazzles us into forgetting that these are human creations, designed by people, for people. And when they are applied to human problems, we cannot afford to treat them as perfect, alien entities whose wisdom exceeds our own.

As the early Internet pioneer Jaron Lanier points out in his digital-age cautionary manifesto You Are Not a Gadget, “Software expresses ideas about everything from the nature of a musical note to the nature of personhood. Software is also subject to an exceptionally rigid process of “lock-in.”* Therefore, ideas (in the present era, when human affairs are increasingly software-driven) have become more subject to lock-in than in previous eras.”

If digitized ideas are uniquely vulnerable to lock-in, we need to be exceedingly careful and creative in crafting them. For example, the government-driven “school reform movement” that has swept public education nationwide since 2001’s No Child Left Behind Act, seeks to transform learning based on data-collection from standardized tests, themselves a highly imperfect model of learning. In many cases, school systems rely on data from these tests to make hiring and instructional decisions, to a degree entirely unwarranted by the tests’ current level of sophistication. The clarion call of this movement is the demand for “objective” learning. That’s what the tests are supposedly designed to measure. But learners aren’t really objective. Nor is thinking, which is what, in the end, schools are supposed to teach.

Computers, databases, and other models of reality aren’t going anywhere – the technology will continue to become more sophisticated and its role in our lives will continue to deepen. Now, therefore, is the time for us to recognize where machines can meet our needs and where they cannot – and to design them for human use rather than seeking to adapt ourselves to their shortcomings.

*The process whereby an idea or a model becomes the basis for subsequent development, so that its flaws cannot be remedied without dismantling the entire system that is built upon it.

July 11, 2020

How to Do Technical Analysis.

How to Do Technical Analysis.

Technical analysis evolved from the stock market theories of Charles Henry Dow, founder of the Wall Street Journal and co-founder of Dow Jones and Company. The goal of technical analysis is to predict the future price of stocks, commodities, futures and other tradeable securities based on past prices and performance of those securities. Technical analysts apply the law of supply and demand to understand how the stock market and other securities exchanges work, identifying trends and profiting from them. The following steps will help you understand technical analysis and how it is applied to choosing stocks and other commodities.

Steps.
1. Understand Dow's theories behind technical analysis. Three of Dow's theories about investments form the underpinnings of technical analysis and serve to guide the technical analyst's approach to financial markets. Those theories are described below with an explanation of how technical analysts interpret them.
Market fluctuations reflect all known information. Technical analysts believe that changes in the price of a security and how well it trades in the market reflect all the available information about that security as garnered from all pertinent sources. Price listings are therefore thought of as fair value. Sudden changes in how a stock trades often precedes major news about the company that issued the stock. Technical analysts don't concern themselves with the price-to-earnings ratio, shareholder equity, return on equity or other factors that fundamental analysts consider.
Price movements can often be charted and predicted. Technical analysts acknowledge that there are periods when prices move randomly, but there are also times when they move in an identifiable trend. Once a trend is identified, it is possible to make money from it, either by buying low and selling high during an upward trend (bull market) or by selling short during a downward trend (bear market). By adjusting the length of time the market is being analyzed, it is possible to spot both short- and long-term trends.
History repeats itself. People don't change their motivations overnight; traders can be expected to react the same way to current conditions as they did in the past when those same conditions occurred. Because people react predictably, technical analysts can use their knowledge of how other traders reacted in the past to profit each time conditions repeat themselves. In this respect, technical analysis differs from "efficient market theory," which ignores the effect that human actions and reactions have on the market.
2. Look for quick results. Unlike fundamental analysis, which looks at balance sheets and other financial data over relatively long periods of time, technical analysis focuses on periods no longer than a month and sometimes as short as a few minutes. It is suited to people who seek to make money from securities by repeatedly buying and selling them rather than those who invest for the long term.
3. Read charts to spot price trends. Technical analysts look at charts and graphs of security prices to spot the general direction in which prices are headed, overlooking individual fluctuations. Trends are classified by type and duration.
Up trends, characterized by highs and lows that become progressively higher.
Down trends are seen when successive highs and lows are progressively lower.
Horizontal trends in which successive highs and lows fail to change much from previous highs and lows.
Trend lines are drawn to connect successive highs to each other and successive lows to each other. This makes spotting trends easy. Such trend lines are often called channel lines.
Trends are classified as major trends when they last longer than a year, as intermediate trends when they last at least a month but less than a year, and as near-term trends when they last less than a month. Intermediate trends are made up of near-term trends, and major trends are made up of near-term and intermediate trends, which may not go in the same direction as the larger trend they are part of. (An example of this would be a month-long downward price correction in a year-long bull market. The bull market is a major trend, while the price correction is an intermediate trend within it.)
Technical analysts use four kinds of charts. They use line charts to plot closing stock prices over a period of time, bar and candlestick charts to show the high and low prices for the trading period (and gaps between trading periods if there are any), and point and figure charts to show significant price movements over a period of time.
Technical analysts have coined certain phrases for patterns that appear on the charts they analyze. A pattern resembling a head and shoulders indicates that a trend is about to reverse itself. A pattern resembling a cup and handle indicates that an upward trend will continue after pausing for a short downward correction. A rounding bottom, or saucer bottom pattern indicates a long-term bottoming out of a downward trend before an upswing. A double top or double bottom pattern indicates two failed attempts to exceed a high or low price, which will be followed by a reversal of the trend. (Similarly, a triple top or bottom shows three failed attempts that precede a trend reversal.) Other patterns include triangles, wedges, pennants and flags.
4. Understand the concepts of support and resistance. Support refers to the lowest price a security reaches before more buyers come in and drive the price up. Resistance refers to the highest price a security reaches before owners sell their shares and cause the price to fall again. These levels are not fixed, but fluctuate. On a chart depicting channel lines, the bottom line is the support line (floor price for the security), while the top line is the resistance line (ceiling price). Support and resistance levels are used to confirm the existence of a trend and to identify when the trend reverses itself.
Because people tend to think in round numbers (10, 20, 25, 50, 100, 500, 1,000, and so on), support and resistance prices are often given in round numbers.
It is possible for stock prices to rise above resistance levels or fall below support levels. In such cases, the resistance level may become a support level for a new, higher resistance level; or the support level may become a resistance level for a new, lower support level. For this to happen, the price has to make a strong, sustained change. Such reversals may be common in the short term.
Generally, when securities are trading near a support level, technical analysts tend to avoid buying because of concern for price volatility. They may, however, buy within a few points of that level. Those who sell short use the support price as their trading point.
5. Pay attention to the volume of trades. How much buying and selling goes on indicates the validity of a trend or whether it's reversing itself. If the trading volume increases substantially even as the price rises substantially, the trend is probably valid. If the trading volume increases only slightly (or even falls) as the price goes up, the trend is probably due to reverse itself.
6. Use moving averages to filter out minor price fluctuations. A moving average is a series of calculated averages measured over successive, equal periods of time. Moving averages remove unrepresentative highs and lows, making it easier to see overall trends. Plotting prices against moving averages, or short-term averages against long-term averages, makes it easier to spot trend reversals. There are several averaging methods used.
The simple moving average (SMA) is found by adding together all the closing prices during the time period and dividing that sum by the number of prices included.
The linear weighted average takes each price and multiplies it by its position on the chart before adding the prices together and dividing by the number of prices. Thus, over a five-day period, the first price would be multiplied by 1, the second by 2, the third by 3, the fourth by 4 and the fifth by 5.
An exponential moving average (EMA) is similar to the linear moving average, except that it weighs only the most recent prices used in computing the average, making it more responsive to the latest information than a simple moving average.
7. Use indicators and oscillators to support what the price movements are telling you. Indicators are calculations that support the trend information gleaned from price movements and add another factor into your decision to buy or sell securities. (The moving averages described above are an example of an indicator.) Some indicators can have any value, while others are restricted to a particular range of values, such as 0 to 100. The latter indicators are termed oscillators.
Indicators may be either leading or lagging. Leading indicators predict price movements and are most useful during horizontal trends to signal uptrends or downtrends. Lagging indicators confirm price movements and are most useful during uptrends and downtrends.
Trend indicators include the average directional index (ADX) and the Aroon indicator. The ADX uses positive and negative directional indicators to determine how strong an uptrend or downtrend is on a scale of 0 to 100. Values below 20 indicate a weak trend and over 40 a strong one. The Aroon indicator plots the lengths of time since the highest and lowest trading prices were reached, using that data to determine the nature and strength of the trend or the onset of a new trend.
The best known volume indicator is the moving average convergence-divergence (MACD) indicator. It is the difference between two exponential moving averages, one short-term and the other long-term, as plotted against a center line that represents where the two averages equal each other. A positive MACD value shows that the short-term average is above the long-term average and the market should move upward. A negative MACD value shows that the short-term average is below the long-term average and that the market is moving downward. When the MACD is plotted on a chart, and its line crosses the centerline, it shows when the moving averages that make it up cross over. Another volume-related indicator, the on-balance volume (OBV) indicator, is the total trading volume for a given period, a positive number when the price is up and a negative number when the price is down. Unlike the MACD, the actual value of the number has less meaning than whether the number is positive or negative.
How frequently securities are being traded is tracked by both the relative strength index (RSI) and the stochastic oscillator. The RSI ranges from 0 to 100; a value over 70 suggests that the security being evaluated is being bought too frequently, while a value under 30 suggests it is being sold too frequently. RSI is normally used for 14-day periods but may be used for shorter periods, making it more volatile. The stochastic oscillator also runs from 0 to 100. It signals too frequent buying at values over 80 and too frequent selling at values under 20.

Community Q&A

Question : What is meant by selling short during a downward trend?
Answer : It means borrowing shares of stock from a broker in order to sell them at one price, then waiting for their price to drop (in the "downward trend") so you can buy them back at the lower price, thus making a profit (at which point you give the shares back to the broker). This is purely a gamble (but a popular one among some professional investors).
Question : What is meant by "buy at pullback and sell at strength"?
Answer : That's another way of saying "buy low, sell high." A "pullback" is a reversal in a rising trend, offering a brief opportunity to buy at a relatively low price. "Strength" is a high price relative to recent levels.
Question : What is meant by saying, "Buy low, sell high"?
Answer : It means you should sell shares only when they are valued at a price higher than the price at which you purchased them. In practice, it means you should buy shares only after they have recently fallen in price, and you should sell shares only after they have recently risen in price -- again assuming the selling price is higher than the original purchase price. That's not always easy to do, but that's the theoretical objective in owning stock.
Question : How can I watch how technical analysis works?
Answer : You would have to find and contact a value investor, and ask if they would let you observe them at work. A stockbroker might be able to help you find such an investor.

Tips.

While most brokerage houses are geared toward long-term investing and employ mostly fundamental analysts, many now employ a few technical analysts as well.

Warnings.
Although some technical analysts use a single indicator or oscillator to tell them whether to buy or sell, indicators are best used in conjunction with one another and with price movements and chart patterns.
Know the limitations of technical analysis: it doesn't always work. For example, the most perfect head and shoulder top pattern possible may be formed (thought to be an extremely bearish technical indicator), and you sell the stock, only to see a huge extended rally from there, leaving you behind. Do not rely exclusively on technical analysis. Use it as a guide, and combine it with fundamental analysis.

June 25, 2020

How Warren Buffett Makes Decisions – The Secret to His Investing Success.

How Warren Buffett Makes Decisions – The Secret to His Investing Success.

By Michael Lewis.

Warren Buffett is considered by many to be the most successful stock investor ever. Despite the occasional mistake, Buffett’s investing strategies are unrivaled. In 1956, at age 26, his net worth was estimated at $140,000. MarketWatch estimated his net worth at the end of 2016 to be $73.1 billion, an astounding compound annual growth rate of 24.5%. By contrast, the S&P 500 has grown at an average rate of 6.79% and most mutual funds have failed to equal the annual S&P 500 return consistently.

Buffett has achieved these returns while most of his competition failed. According to John Bogle, one of the founders and former Chairman of The Vanguard Group, “The evidence is compelling that equity fund returns lag the stock market by a substantial amount, largely accounted for by cost, and that fund investor returns lag fund returns by a substantial amount, largely accounted for by counterproductive market timing and fund selection.”

Since the evidence shows that Buffet has been an exceptional investor, market observers and psychologists have searched for an explanation to his success. Why has Warren Buffett achieved extraordinary gains compared to his peers? What is his secret?

A Long-Term Perspective. Why Some People Are More Successful Than Others.
Philosophers and scientists have long sought to determine why some people are more successful than others at building wealth. Their findings are varied and often contradictory.

For centuries, people believed their fate, including wealth and status, depended upon the capricious favor of pagan gods – more specifically, the favor of Tyche (Greek) or Fortuna (Roman). Expansion of the Judeo-Christian-Islamic religions and their concepts of “free will” led to the general belief that individuals could control their destiny through their actions, or lack thereof.

Modern science, specifically psychology and neuroscience, advanced a theory of biological determinants that control human decisions and actions. This theory suggests that free will might not be as “free” as previously thought. In other words, we may be predisposed to certain behaviors that affect the ways we process information and make decisions.

Evolutionary biologists and psychologists have developed a variety of different theories to explain human decision-making. Some claim that the ability to make superior decisions with favorable outcomes is the result of eons of natural selection, which favors individuals with exceptional genetics, such as those with high IQs.

Despite the perception that a high IQ is necessary for building wealth, study after study indicates that the link between super-intelligence and financial success is dubious at best:

Dr. Jay Zagorsky’s study in the Intelligence Journal found no strong relationship between total wealth and intelligence: “People don’t become rich just because they are smart.”
Mensa members rank in the top 2% of the brightest people on earth, but most are not rich and are “certainly not the top 1% financially,” according to an organization spokesperson. A study by Eleanor Laise of the Mensa Investment Club noted that the fund averaged 2.5% per annum for a 15-year period, while the S&P 500 averaged 15.3% during the same time. One member admitted that “we can screw up faster than anyone,” while another described their investment strategy as “buy low, sell lower.”
Buffett has never claimed to be a genius. When asked what he would teach the next generation of investors at the 2009 Berkshire Hathaway annual meeting, he replied, “In the investing business, if you have an IQ of 150, sell 30 points to someone else. You do not need to be a genius . . . It’s not a complicated game; you don’t need to understand math. It’s simple, but not easy.”

He later expanded the thought: “If calculus or algebra were required to be a great investor, I’d have to go back to delivering newspapers.”

Economists’ Rational Man.
Economists have historically based their models upon the presumption that humans make logical decisions. In other words, a person faced with a choice balances certainties against risks. The theory of expected value presumes that people facing choices will choose the one that has the largest combination of expected success (probability) and value (impact).

A rational person would always model the industrious ant in Aesop’s fable, not the insouciant grasshopper. The idea that people would make decisions contrary to their interests is inconceivable to economists.

To be fair, most economists recognize the flaws in their models. Swedish economist Lars Syll notes that “a theoretical model is nothing more than an argument that a set of conclusions follows from a fixed set of assumptions.”

Economists presume stable systems and simple assumptions, while the real world is in constant flux. Paraphrasing H.L Mencken’s famous quote, there is always a simple economic model [well-known solution] for every human problem. This notion is neat, plausible, and wrong.

Psychologists’ Natural Man.
According to Harvard professor Daniel Lieberman, humans are naturally inclined to seek the solutions that require the least expenditure of energy.

In the real world, we have difficulty deferring immediate gratification for future security, selecting investments best suited to our long-term goals and risk profile, and acting in our best financial interests. Psychological research suggests that the difficulty is rooted in our brains – how we think and make decisions.

Researchers Susan Fiske and Shelley Taylor postulate that humans are “cognitive misers,” preferring to do as little thinking as possible. The brain uses more energy than any other human organ, accounting for up to 20% of the body’s total intake.

When decisions involve issues more remote from our current state in distance or time, there is a tendency to defer making a choice. This impulse accounts for the failure of people to save in the present since the payoff is years in the future.

As far as we know, Mr. Buffett’ brain is similar to other investors and he experiences the same impulses and anxieties as others. While he experiences the tensions that arise in everyone when making decisions, he has learned to control impulses and make reasoned, rational decisions.

Our Two-Brain System.
The studies by Daniel Kahneman and Amos Tversky provide new insight into decision-making, perhaps the key to Buffett’s success. They theorize that each human uses two systems of mental processing (System 1 and System 2) that work together seamlessly most of the time. Khaneman’s book, “Thinking, Fast and Slow,” outlines these two systems.

System 1 – Think Fast.
System 1, also referred to as the “emotional brain,” developed as the limbic system in the brain of early humans. Sometimes called the “mammalian brain,” it includes the amygdala, the organ where emotions and memories arise.

Neuroscientist Paul MacLean hypothesized that the limbic system was one of the first steps in the evolution of the human brain, developed as part of its fight or flight circuitry. Through necessity, our primitive ancestors had to react quickly to danger when seconds could mean escape or death.

The emotional brain is always active, capable of making quick decisions with scant information and conscious effort. It continuously makes and remakes models – heuristic frames – of the world around it, relying on the senses and memories of past events.

For example, an experienced driver coordinates steering and speed of an automobile on an empty highway almost effortlessly, even casually. The driver can simultaneously carry on conversations with passengers or listen to the radio without losing control of the vehicle. The driver is relying on the decisions of System 1.

The emotional brain is also the source of intuition, that “inner voice” or gut feeling we sometimes get without being consciously aware of the underlying reasons for its occurrence. We rely primarily on this system for the hundreds of everyday decisions we make – what to wear, where to sit, identifying a friend. Paradoxically, System 1 is a source of creativity as well as habits.

System 2 – Think Slow.
System 2, also called the “logical brain,” is slower, more deliberate, and analytical, rationally balancing the benefits and costs of each choice using all the available information.

System 2 decisions take place in the latest evolutionary addition to the brain – the neocortex. It is believed to be the center of humans’ extraordinary cognitive activity. System 2 was slower to evolve in humans and requires more energy to exercise, indicating the old saw “Thinking is hard” is a fact.

Kahneman characterizes System 2 as “the conscious, reasoning self that has beliefs, makes choices, and decides what to think about and do.” It is in charge of decisions about the future, while System 1 is more active in the moment. While our emotional brain can generate complex patterns of ideas, it is also freewheeling, impulsive, and often inappropriate.

Fortunately, System 1 works well most of the time; its models of everyday situations are accurate, its short-term predictions are usually correct, and its initial reactions to challenges are swift and mostly appropriate.

System 2 is more controlled, rule-based, and analytical, continuously monitoring the quality of the answers provided by System 1. Our logical brain becomes active when it needs to override an automatic judgment of System 1.

For example, the earlier driver proceeding casually down the road is more focused when passing a semi-truck on a narrow two-lane road or in heavy traffic, actively processing the changing conditions and responding with deliberate actions. His or her mental effort is accompanied by detectable physical changes, such as tensed muscles, increased heart rate, and dilated pupils. In these circumstances, System 2 is in charge.

The logical brain normally functions in low-effort mode, always in reserve until System 1 encounters a problem it cannot solve or is required to act in a way that doesn’t come naturally. Solving for the product of 37 x 82 requires the deliberate processes of System 2, while the answer to a simple addition problem, such as the sum of 2 + 2, is a System 1 function. The answer is not calculated, but summoned from memory.

Neuropsychologists Abigail Baird and Jonathan Fugelsang’s 2004 study indicates that System 2 does not fully develop until adulthood. Their findings suggest the reason that adolescents are more likely to engage in risky behavior is because they lack the mental hardware to weigh decisions rationally. For most people, the two systems work together seamlessly, transitioning from one to the other as needed.

The Buffett Style.
The Oracle of Omaha’s key to investing is understanding and coordinating the two systems of decision-making. Buffett relies upon System 1 to intuitively seek out investments he finds attractive and understands.

When deciding on a possible investment, he recommends, “If you need a computer or a calculator to decide whether to invest, then don’t do it – invest in something that shouts at you – if it is not obvious, walk away . . . If you don’t know the business, the financials won’t help at all.”

Avoid the Traps of Thinking Fast.
Master investors like Buffett simplify their decisions by relying upon System 1, and it serves them well in most cases. However, they recognize that their emotional decision-making system is also prone to biases and errors, including:

Mental Framing.
Our brains, equipped with millions of sensory inputs, create interpretive mental “frames” or filters to make sense of data. These mental filters help us understand and respond to the events around us. Framing is a heuristic – a mental shortcut – that provides a quick, easy way to process information. Unfortunately, framing can also provide a limited, simplistic view of reality that can lead to flawed decisions.

The choices we make depend on our perspective, or the frames surrounding the problem. For example, research shows that people are likely to proceed with a decision if the outcome is presented with a 50% chance of success and decline if the consequence is expressed with a 50% chance of failure, even though the probability is the same in either case.

Most investors incorrectly frame stock investments by thinking of the stock market as a stream of electronic bits of data independent of the underlying businesses the data represents. The constant flow of information about prices, economies, and expert opinions triggers our emotional brains and stimulates quick decisions to reap profits (pleasure) or prevent loss (pain).

Buffett recommends investors not think of an investment in stock as “a piece of paper whose price wiggles around daily” and is a candidate for sale whenever you get nervous.

Short-term thinking – System 1 – often leads to trading stocks, not investing in companies. Day traders – those who buy and sell stocks within a single market session – are unusually unsuccessful, according to day trading studies by the University of California-Berkeley:

80% of all day traders quit within the first two years.
Active traders underperform the stock market average by 6.5% annually.
Only 1.6% of day traders make a net profit each year.
Financial data is especially susceptible to framing. Companies always express earnings and losses positively, either as an increase compared to past results or a smaller loss than previous periods. Trends can be manipulated based upon the comparison point and time interval.

Even the words we use to describe a choice establish a frame for assessing value. Characterizations like “high growth,” “turnaround,” or “cyclical” trigger the subconscious stereotypes we have for such terms without regard to the underlying financial data.

Framing can lead rational people to make irrational decisions based upon their projections of the outcome. This accounts for the difference between economics’ rational man and psychology’s natural man.

Buffett has learned to frame his investment opportunities appropriately to avoid short-term, arbitrary outcomes:

“We [Berkshire Hathaway] select such investments on a long-term basis, weighing the same factors as would be involved in the purchase of 100% of an operating business.”
“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
“If you aren’t willing to own a stock for 10 years, don’t even think about owning it 10 minutes.”
Loss Aversion.
Kahneman and Tversky determined that in human decision-making, losses loom larger than gains. Their experiments suggest that the pain of loss is twice as a great as the pleasure from gain. This feeling arises in the amygdala, which is responsible for generating fearful emotions and memories of painful associations.

The fact that investors are more likely to sell stocks with profit than those with a loss, when the converse strategy would be more logical, is evidence of the power of loss aversion.

While Buffett sells his positions infrequently, he cuts his losses when he realizes he has made a judgment error. In 2016, Buffett substantially reduced or liquidated his position in three companies, because he believed they had lost their competitive edge:

Wal-Mart: Despite his regrets that he had not purchased more shares earlier, he has been a long-time investor in the company. The rationale for the recent sales is thought to be due to the transition of the retail market from bricks-and-mortar stores to online. A Pew Research Center study found almost 80% of Americans today are online shoppers versus 22% in 2000.
Deere & Co: Buffett’s initial purchases of the agricultural equipment manufacturer began in the third quarter of 2012. By 2016, he owned almost 22-million shares with an average cost of less than $80 per share. He liquidated his shares during the last two quarters of 2016 when prices were more than $100 per share. Buffett may have felt that farm income, having fallen by half since 2013 due to worldwide bumper crops, was unlikely to improve, leaving the premier provider of agricultural equipment unable to continue to expand its profits.
Verizon: Having owned the stock since 2014, he liquidated his entire position in 2016, due to a loss of confidence in management after the company’s questionable acquisition of Yahoo and the continued turmoil in the wireless carrier market.
Our distaste for losses can create anxiety and trick us into acting prematurely because we fear being left out in a rising market or staying too long in a bear market. Buffett and Munger practice “assiduity – the ability to sit on your ass and do nothing until a great opportunity presents itself.”

Representativeness.
People tend to ignore statistics and focus on stereotypes. An example in the Association of Psychological Science Journal illustrates this common bias. When asked to select the proper occupation of a shy, withdrawn man who takes little interest in the real world from a list including farmer, salesman, pilot, doctor, and librarian, most people incorrectly chose librarian. Their decision ignores the obvious: there are many more farmers in the world than librarians.

Buffett focuses on finding the “inevitables” – great companies with insurmountable advantages – rather than following conventional wisdom and accepted patterns of thinking favored by System 1’s decision-making process. In his 1996 letter to investors, he defines Coca-Cola and Gillette as two companies that “will dominate their fields worldwide for an investment lifetime.”

He is especially wary of “imposters” – those companies that seem invincible but lack real competitive advantage. For every inevitable, there are dozens of imposters. According to Buffett, General Motors, IBM, and Sears lost their seemingly insurmountable advantages when values declined in “the presence of hubris or of boredom that caused the attention of the managers to wander.”

Buffett recognizes that companies in high-tech or embryonic industries capture our imaginations – and excite our emotional brains – with their promise of extraordinary gains. However, he prefers investments where he is “certain of a good result [rather] than hopeful of a great one” – an example of the logical brain at work.

Anchoring.
Evolution is the reason humans rely too heavily on the first or a single bit of information they receive – their “first impression.” In a world of deadly perils, delaying action can lead to pain or death. Therefore, first impressions linger in our minds and affect subsequent decisions. We subconsciously believe that what happened in the past will happen in the future, leading us to exaggerate the importance of the initial purchase price in subsequent decisions to sell a security.

Investors unknowingly make decisions based on anchoring data, such as previous stock prices, past years’ earnings, consensus analyst projections or expert opinions, and prevailing attitudes about the direction of stock prices, whether in a bear or bull market. While some characterize this effect as following a trend, it is a System 1 shortcut based on partial information, rather than the result of System 2 analysis.

Buffett often goes against the trend of popular opinion, recognizing that “most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.” When making a decision based on historical data, he notes, “If past history was all that is needed to play the game of money, the richest people would be librarians.”

Buffett’s approach is neither to follow the herd nor purposely do the opposite of the consensus. Whether people concur with his analysis isn’t important. His goal is simple: acquire, at a reasonable price, a business with excellent economics and able, honest management.

Despite considering IBM an “imposter” in 1996, Berkshire Hathaway began acquiring the stock in 2011, consistently adding to Buffett’s position over the years. By the end of the first quarter in 2017, Berkshire owned more than 8% of the outstanding shares with a value greater than $14 billion.

While his analysis remains confidential, Buffett believes that the investors have discounted the future of IBM too severely and failed to note its transition to a cloud-based business might lead to brighter growth prospects and a high degree of customer retention. Also, the company pays a dividend almost twice the level of the S&P 500 and actively repurchases shares on the open market.

The growing IBM position – quadrupling since the initial purchase – is evidence that Buffett isn’t afraid to take action when he is comfortable with his analysis: “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”

Availability.
Humans tend to estimate the likelihood of an event occurring based on the ease with which it comes to mind. For example, a 2008 study of State lottery sales showed that stores that sell a publicized, winning lottery ticket experience a 12% to 38% increase in sales for up to 40 weeks following the announcement of the winner.

People visit stores selling a winning ticket more often due to the easy recall of the win, and a bias that the location is “lucky” and more likely to produce another winning ticket than a more convenient store down the street.

This bias frequently affects decisions about stock investments. In other words, investor perceptions lag reality. Momentum, whether upward or downward, continues well past the emergence of new facts. Investors with losses are slow to reinvest, often sitting on the sidelines until prices have recovered most of their decline (irrational pessimism).

Conversely, reinforcement from a bull market encourages continued purchasing even after the economic cycle turns down (irrational optimism). Therefore, investors tend to buy when prices are high and sell when they are low.

The S&P 500 fell 57% between late 2007 and March 2009, devastating investor portfolios and liquidating stocks and mutual funds. Even though the index had recovered its losses by mid-2012, individual investors had not returned to equity investments, either staying in cash or purchasing less risky bonds.

At the time, Liz Ann Sonders, Chief Investment Strategist at Charles Schwab & Co., noted, “Even three-and-a-half years into this bull market and the gains we’ve seen since June [2012], it has not turned this psychology [of fear] around.” In other words, many individuals took the loss but did not participate in the subsequent recovery.

Buffett has always tried to follow the advice of his mentor, Benjamin Graham, who said, “Buy not on optimism [or sell due to pessimism], but on arithmetic.” Graham advocated objective analysis, not emotions, when buying or selling stocks: “In the short run, the market is a voting machine [emotional], but in the long run it is a weighing machine [logical].”

Affect.
We tend to assess probabilities based on our feelings about the options. In other words, we judge an option less risky solely because we favor it and vice versa. This bias can lead people to buy stock in their employer when other investments would be more appropriate for their goals. Overconfidence in one’s ability magnifies the negative impact of affect.

For example, Buffett invested $350 million in preferred stock of U.S. Airways in 1989, despite his belief that airlines and airline manufacturers had historically been a death trap for investors. The investment followed a dinner with Ed Colodny, the CEO of the airline, who impressed Buffett. Certain that the preferred stock was safe and the airline had a competitive seat cost (around 12 cents per mile), he made the investment.

Buffett later admitted his analysis “was superficial and wrong,” perhaps due to hubris and his like for Colodny. An upstart Texas airline (Southwest Airlines) subsequently upset the competitive balance in the industry with seat costs of 8 cents per mile, causing Berkshire Hathaway to write down its investment by 75%.

Buffett was lucky to make a significant profit on the investment ($216 million), primarily because the airline subsequently and unexpectedly returned to profitability and was able to pay the accrued dividends and redeem its preferred stock.

Final Word.
Mr. Buffett’s investment style has been criticized by many over the decades. Trend followers and traders are especially critical of his record and philosophy, claiming that his results are the result of “luck, given the relatively few trades that made him so wealthy.”

Hedge fund manager Michael Steinhardt, who Forbes called “Wall Street’s Greatest Trader,” said during a CNBC interview that Buffett is “the greatest PR person of all time. And he has managed to achieve a snow job that has conned virtually everyone in the press to my knowledge.”

Before following the advice of those who are quick to condemn Buffett’s investment style, it should be noted that no investment manager has come close to rivaling Buffet’s record over the past 60 years. While Steinhardt’s returns are similar to those of Buffett, his were for a period of 28 years – less than one-half of Buffett’s cycle.

Despite their antipathy, both men would agree that System 2 decision-making is critical to investment success. Steinhardt, in his autobiography “No Bull: My Life In and Out of Markets,” said that his results required “knowing more and perceiving the situation better than others did . . . Reaching a level of understanding that allows one to feel competitively informed well ahead of changes in ‘street’ views, even anticipating minor stock price changes, may justify at times making unpopular investments.”

Buffett appears to agree, insisting on taking the time for introspection and thought. “I insist on a lot of time being spent, almost every day, to just sit and think. That is very uncommon in American business. I read and think. So I do more reading and thinking, and make fewer impulsive decisions than most people in business.”

Do you take the time to gather facts and make carefully analyzed investment decisions? Perhaps you are more comfortable going with the flow. What is your decision-making preference and how has it worked out for you thus far?
Do you know anyone who has owned the same stock for 20 years? Warren Buffett has held three stocks – Coca-Cola, Wells Fargo, and American Express – for more than 20 years. He has owned one stock – Moody’s – for 15 years, and three other stocks – Proctor & Gamble, Wal-Mart, and U.S. Bancorp – for over a decade.

To be sure, Mr. Buffett’s 50-year track record is not perfect, as he has pointed out from time to time:

Berkshire Hathaway: Pique at CEO Seabird Stanton motivated his takeover of the failing textile company. Buffett later admitted the purchase was “the dumbest stock I ever bought.”
Energy Future Holding: Buffett lost a billion dollars in bonds of the bankrupt Texas electric utility. He admitted he made a huge mistake not consulting his long-term business partner Charlie Munger before closing the purchase: “I would be unwilling to share the credit for my decision to invest with anyone else. That was just a mistake – a significant mistake.”
Wal-Mart: At the 2003 Berkshire Hathaway shareholder meeting, Buffet admitted his attempt to time the market had backfired: “We bought a little, and it moved up a little, and I thought maybe it would come back. That thumb-sucking has cost us in the current area of $10 billion.”
Even with these mistakes, Buffett has focused on making big bets that he intends to hold for decades to come. A longer time horizon has allowed him to take advantage of opportunities few others have the patience for. But how has he been able to make these successful bets in the first place?

source : https://www.moneycrashers.com/warren-buffett-decisions-secret-investing-success.

August 14, 2020

How to Be a Successful Business Owner

How to Be a Successful Business Owner.

Most business owners will tell you that starting a business is both one of the most challenging and most rewarding ways to earn a living. Being a successful business owner requires a large amount of hard work and dedication, but also generally relies on a set of personal qualities and business practices that are common characteristics of successful entrepreneurs. These characteristics lie as much in a business's founding principles as in its day-to-day operations and dictate every decision the entrepreneur makes. By following these guidelines, you can up your chances of founding a successful business or getting your existing business back on track.

Part 1 Finding the Right Mindset.
1. Do what you know. That is, you should start a business that focuses on what you have experience in. That experience can be either prior work experience or a personal hobby that you're ready to turn into a career. Even if a business idea seems highly profitable in theory, don't start that business unless your heart is in it. While profit is important, it likely won't keep you coming in early every day and driving growth.
For example, imagine you have experience making coffee as a barista or waiter and want to turn your passion for good coffee into a small business. You would already know a good amount about the industry and be able to apply not only your knowledge but your passion to your work.
2. Start with a well-defined purpose. While the financial benefits of business ownership can be great, most successful business owners don't start with money in mind. To get your business off the ground, you'll need a clear purpose. This purpose should be something more intangible than money, like giving back to your community by creating jobs, solving a problem that you see in your daily life, or pursuing a passion. This doesn't mean that you shouldn't also strive for profitability, just that your primary goal should be the achievement of a greater purpose.
For our coffee shop example, your purpose would be serving the perfect cup of coffee to every customer. Alternately, it could be to form a community in your coffee shop where people can meet and spend time with friends.
3. Understand your customer. Before you get started, take some time to do market research and get to know your customers and your industry. The U.S. Small Business Administration provides a great deal of information on which services and products are in demand. You will also want to think about who will be buying your product or using your service and learn the best way to appeal to this population.
With the coffee shop, ask yourself: Am I trying to appeal to "coffee snobs" who don't mind waiting five minutes for their pour-over? Or is my focus on the people who are on their way to work and want to grab a cup and run? Or both? Understanding the people you plan to serve can help you serve them better.
4. Find a first step instead of a destination. You should always start with a business model that can be up and running quickly on a low budget. Too many small businesses start with grandiose goals that will require a large amount of startup capital and investors. However, successful businesses will have a model that can be used on a smaller scale. This proves to potential investors that your idea is a valid way of making money, and increases your odds of ever getting investment money (if that's what you're looking for).
For example, imagine that in our example, you want to start a large operation that sources, imports, roasts, and packages its own coffee beans that are then either sold or served to customers at its coffee shops. Rather than seeking huge contributions from investors to buy all of this equipment, you should start with a small coffee shop first, then maybe try sourcing and importing beans, and work up from there to build a brand.
5. Create a support network. One of the most important parts of successful business ownership is getting over your own ego and seeking help. Your biggest sources of advice are going to be your group of business associates and other professionals that share your goals. Surround yourself with knowledgeable and successful people and feed off of their ideas and enthusiasm.
Also seek general small business tips online; the web is a goldmine of information. Just be sure your information is from a reliable source.
6. Find a mentor. A good mentor in this case is someone who has already run or is running a successful business of their own. A good example would be a family member or family friend that has been successful in business. This mentor can help you with anything from knowing how to manage your employees to properly filing your taxes. Because their knowledge comes from direct experience, they're able to help you more personally than any other source could.
While your mentor doesn't have to have founded the same type of business you are starting, it would help. For example, another coffee shop founder would be the best source of information in our coffee shop example, but a restaurateur  could also be of significant help.

Part 2 Running Your Business Efficiently.
1. Focus only on your primary operations at first. That is, avoid being caught up in every business opportunity that comes your way. It's better to be perfect at one thing than mediocre at five. This applies as much to making decisions to diversify your business as it does to deciding to take on additional projects for yourself outside of your primary business. Focusing on one thing will allow you to commit all of your resources there and be more productive in that endeavor.
Continuing with our example, imagine that you see another coffee shop making money by selling customized coffee-related merchandise. This may make you want to jump into this market as well. However, doing so before establishing your primary objective, making coffee, would introduce significant risk, and may detract from your ability to focus on coffee quality.
2. Focus on cash flow, not profit. While making a profit should certainly be one of your goals, it should not be your main focus when you are starting out. Cash flow is far more important — many small businesses run out of money before they have even been around long enough to generate a profit, and must close their doors. Pay careful attention to your overhead costs and sales during the first years, and let profit take a backseat.
3. Keep detailed records. In order to be successful, you'll have to make a habit of recording each and every expense and revenue that your company has, as well as every dollar that flows through it. By knowing where exactly your money is coming in and where it's going, you're more capable of recognizing financial difficulties before they arise. In addition, doing this will give you a better idea of where exactly you can make cuts to expenses or increases to revenues.
For example, in our example, you would keep detailed records of how much coffee you bought and sold in a given month and what you paid for it. This could you help you identify if, for example, the price of coffee beans was steadily increasing and help you plan whether or not to raise your own prices or consider switching suppliers.
4. Limit expenses as much as possible. While this may seem obvious, just try to think of areas where you could generate the same effect by spending less money. Consider using pre-owned equipment, finding cheaper forms of advertising (for example, fliers rather than newspaper ads), or negotiating better payment terms with suppliers or customers to save a few dollars here and there. Try to maintain very low spending habits and only spent money when and where you absolutely have to.
In our example, this could mean starting out with used coffee grinders (as long as they still functioned well) and trying to get as many supplies as possible from the same supplier (cups, lids, straws, etc.).
5. Consider supply chain efficiency. Your costs, and therefore your profits, depend on a successful supply chain organization. By fostering good relationships with your suppliers, organizing deliveries, and consistently providing customers with timely service, you can increase your profitability and reputation. Successful supply chain management can also help you eliminate any part of your business with wasted resources, like raw materials or labor.
For example, our example coffee shop would want to be on good terms with its coffee bean supplier and have an organized supply chain structure for a number of reasons. This is especially crucial for ensuring that you never run out of coffee, but could also mean that you could get more consistent deliveries, try new types of coffee bean when they become available, or negotiate lower prices.
6. Consider finding strategic partners. Much like a good mentor, a strategic partner can provide you the boost you need to grow your business. Foster strategic partnerships by reaching out to businesses you think could benefit yours, whether they are suppliers, technology providers, or complementary businesses. A good relationship with another company can provide you both free advertising, lower your costs of doing business, or allow you to expand to new markets, depending on the partners you choose.
For example, your coffee shop could benefit from a strategic relationship with a supplier that gives you access to discounts or new products. Alternately, a strategic partner in a complementary business, such as a pastry shop, could help you both reach new customers and increase your revenues. This could be done either through recommending each other or by offering product's from your partner's business and vice-versa.
7. Be responsible when it comes to debt. It's very important that you realistically assess your ability to pay back any debt that you take on. While starting and running a business is always risk, try to minimize your liabilities by only taking out as much as you absolutely need. And when you do take on debt, be sure to structure your cash flows such that you are paying it off as quickly as possible. Prioritize debt repayment before you do anything else.
For example, if you took out $20,000 to get your coffee shop started, don't think about expanding your product offerings or upgrading your coffee grinders until you've paid that loan back.

Part 3 Growing Your Business.
1. Perfect your business pitch. Have a 30-second speech ready that explains your business as briefly and efficiently as possible, including information about your purpose, your service/products, and your goals. Having a practiced pitch that you can rattle off to anyone can help you in situations where you're trying to make a sale to a customer as well as it can when you're trying to bring an investor on board. If you can't explain your business in this short time, your business plan needs refining.
For your coffee shop, you'd want to explain what you do (sell coffee), your services (the drinks you offer), what makes you special (maybe the coffee you serve is rare or locally roasted), and what you plan to do next (expand to another location, new products, etc.).
2. Earn a reputation for good service. Earning a positive reputation is like free advertising; your customers will spread the word of your business to friends and come back frequently. Treat each and every sale like the success or failure of your business depends on it. This also means that you should be consistent with every action your business takes and every interaction with customers.
For your coffee shop, this may mean throwing out a burnt batch of coffee so that your customers are always served the absolutely best product you can offer.
3. Watch your competition closely. You should always look to your competitors for ideas, especially when you're starting out. Chances are, they're doing something right. If you can figure out what that is, you can implement it in your own business and avoid the trial-and-error they probably went through to get there.
One of the best ways to do this when you're starting out is to examine your competitors' pricing strategies. In our coffee shop example, it would be much simpler to price your coffee similarly to competitors rather than to experiment with different prices on your own.
4. Always be looking for growth opportunities. Once you've gotten established, you should always be on the lookout for places you can expand. Whether that means moving to a larger storefront, increasing manufacturing space, or opening a new location will depend on your business and goals. Successful business owners realize that one of the primary opponents to long-term growth is remaining stagnant. This means taking the risk of expansion rather than resting on your laurels at one, original location.
For our coffee example, maybe there is a nearby area that you find is underserved by coffee shops. Once your primary location is up and running smoothly, you should investigate opening a new shop in that area. This could also mean moving up from a small stand to a full coffee shop, depending on your circumstances.
5. Diversify your income streams. Another way to increase the value of your business is by seeking out other areas where you can make money. Assuming you've already established your primary business, look around and see where you could offer a different service or product. Maybe your customers frequently visit your store for one item and then immediately go to another store for a different item. Find out what that other item is and offer it.
Some easy diversification options for your coffee shop would be offering pastries, sandwiches, or books for purchase.

Community Q&A.

Question : How can I be successful in business generally?
Answer : Read a lot of books on business management and take all the information you can take. Then try to apply it practically. This article may be of use to you: how to become a successful businessman.
Question : How do I make myself CEO of my business?
Answer : If you start a business as a corporation, you (as the founder) can give yourself the responsibilities and title of CEO.

Tips.

Be prepared with 6 months worth of working capital in your business.
This article serves primarily as a guide for the business owner in getting the most out of their business. For more detailed guides that cover the minute details of starting a business, see how to start a small business and how to run a small business.
Pay all insurances up for the year, (I.e., liability, etc.) as soon as possible.

Warnings.
You can lose money if you are personally invested in your company.

June 04, 2020