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Business Investment – Wealth Rules Backed By Science

Jamie Cooper-Hohn

Jamie Cooper-Hohn at Children’s Investment Fund Foundation (By DFID – UK Department for International Development, CC BY 2.0 via Wikimedia Commons)

9 February 2018. Businesses want to make as much money as possible to keep the Grim Reaper at arm’s length. However, methods that exist today are dated. Take the ‘gut feel’ posse as an example. As alarming as it sounds, CEOs and CFOs make decisions not based on the numbers but how an investment makes them feel in their stomach. What if they miss lunch? Jokes aside, you don’t want to be the kind of person who doesn’t use the facts to their advantage as it’s a sure-fire way to fail. Here, then, are the wealth rules which are backed by the boffins.

Use modeling services

Businesses often take punts on products and services which are hard to imagine. From real estate to materials, you don’t get to see the goods before signing on the dotted line. If either doesn’t turn out to be the right standard, there could be damaging consequences for the whole company. As technology has improved, BIM services have taken the risk out of investing. Consider renting or even building a new office. With 3D imaging, it’s easy to see the potential pros and cons of the project. Any that adds undue risk can be dealt with, or you can pull out altogether. Your gut doesn’t give you this data.

Past performance = future results?

The answer to the equation is no. Just because an investment made money in the past doesn’t mean it will fair well forever. There are thousands of variables which impact whether an asset will plummet or skyrocket. Just keeping this probability equation in your mind should be enough to help you avoid risk. For those that want to go a step further, check out the fees and their rate of consistency. Mutual funds, for instance, are proven to be successful when the prices are low. It’s surprising but true.

Hug the status quo

Entrepreneurs have an innate desire for success where others have failed. After all, it’s the sign of a visionary and a captain of industry. At least, it’s the perception. In reality, world-class investors stick to their lane and don’t take unnecessary gambles. Warren Buffett heads Berkshire Hathaway, one the biggest hedge funds in the world. One of his rules is to settle for steady returns instead of taking big risks and returning huge losses. Remember that time is your biggest friend as, scientifically, investments mature with age.

Diversify your portfolio

A business should act in regards to the long-term, but putting your eggs in one basket is dangerous. Portfolios that don’t use asset allocation leave themselves open to mismanagement and bad luck, both of which are destructive. From a science point of view, mixing up investments means there are less risk and a higher chance of success. Then, should the real estate market collapse, your stocks and shares may come to the rescue. If both are impacted, a foray into gold and precious metals becomes more important than ever.

When you make business decisions, do you use science or your stomach?

Opinions expressed in this post are those of the contributor and not those of Science & Enterprise.

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