This is integral with my investment decisions. And it should be with you.
Whats the Number 1 thing that Warren Buffet looks at before investing? I ask this question all of the time - and people always come up with answers such as:
1. Return On Investement
2. Length Of Investment
3. Sector Outlook
4. General Market Outlook
etc etc etc
And generally even within a group of 30 SMART intelligent entrepreneurs and investors the true answer doesnt come up.
The true answer is: Opportunity Cost.
What ELSE can you do with your money instead of investing in this? You should write that down. Because especially in this economic cycle - you need to be able to analyze opportunity cost. Heres my top areas where I analyze my opportunity cost when looking at an investment opportunity:
1. Return On Investment - is there anything else that this money can be used for that would produce a higher return?
If the answer is Yes then
2. Time - will this other investment opportunity take more time or less time than my original plan? If LESS then great I go ahead to point 3. If MORE then I need to sit down and analyze whether the extra return is worth the time.
For example - if I can make a 6% return with Investment 1 and it only takes me 6 hours to do this I can comfortably say that I can return 1% per hour.
But say Investment 2 can generate me a 9% return but will take 12 hours of my time - then my Return Per Hour drops to only 0.75%.
So is it worth my while to do this? For that point number 3 comes in.
3. FUN - Which opportunity can I have more fun with, which one will help me grow more and learn more? So by this stage I know that both opportunities are worth pursuing but one just slightly outshines the other one in terms of Return On Investment and Return On Time.
So now - which one is more fun? And if the one with a less Return On Time is more fun and I can learn more - then is it worth it?
Minesh Bhindi is the head coach at: http://www.TheProtectedTrader.com . A free blog where Zero Risk Investing Strategies are shared.
Whats the Number 1 thing that Warren Buffet looks at before investing? I ask this question all of the time - and people always come up with answers such as:
1. Return On Investement
2. Length Of Investment
3. Sector Outlook
4. General Market Outlook
etc etc etc
And generally even within a group of 30 SMART intelligent entrepreneurs and investors the true answer doesnt come up.
The true answer is: Opportunity Cost.
What ELSE can you do with your money instead of investing in this? You should write that down. Because especially in this economic cycle - you need to be able to analyze opportunity cost. Heres my top areas where I analyze my opportunity cost when looking at an investment opportunity:
1. Return On Investment - is there anything else that this money can be used for that would produce a higher return?
If the answer is Yes then
2. Time - will this other investment opportunity take more time or less time than my original plan? If LESS then great I go ahead to point 3. If MORE then I need to sit down and analyze whether the extra return is worth the time.
For example - if I can make a 6% return with Investment 1 and it only takes me 6 hours to do this I can comfortably say that I can return 1% per hour.
But say Investment 2 can generate me a 9% return but will take 12 hours of my time - then my Return Per Hour drops to only 0.75%.
So is it worth my while to do this? For that point number 3 comes in.
3. FUN - Which opportunity can I have more fun with, which one will help me grow more and learn more? So by this stage I know that both opportunities are worth pursuing but one just slightly outshines the other one in terms of Return On Investment and Return On Time.
So now - which one is more fun? And if the one with a less Return On Time is more fun and I can learn more - then is it worth it?
Minesh Bhindi is the head coach at: http://www.TheProtectedTrader.com . A free blog where Zero Risk Investing Strategies are shared.