Explain the reasons why shares of good companies may or may not turn out to be good investments. By virtue of the definition of good companies (those that have demonstrated rapid growth and positive earnings in the past), it could be asserted that their shares may or may not turn out to be good investments. There is apparent manifested volatility of possible performance using the total returns to shareholders (TRS) measured according to the share price appreciation plus dividend yield over a prescribed time period . As such, the components which classify organizations as good companies (rapid growth and positive earnings) are not the only components to be considered when classifying good investments. As contended, “over short periods TRS embodies changes in expectations about the future performance of a company more than its actual underlying performance and health. Companies that consistently meet high performance standards can thus find it hard to deliver high TRS: the market may think that management is doing an outstanding job, but this belief has already been factored into share prices” (Dobbs & Koller: Stock market performance, 2016, par. 2). The risk and return components and valuation of the investment in the long run should spell the difference between a good company and a good investment .
How does the market or public generally define a good investment? The market or public generally define a good investment when there are significant returns to the amount invested within the most minimum risk possible and given a stipulated time period. The ability to generate an optimal return to the investment given the expected risk would thereby define a good investment, when compared to other earning opportunities in the market.
How would you personally define a good investment? Actually, for me, a good investment is generating returns of over 30 to 50% and above of my invested funds. Any returns below that would be classified as an average earning investment.
Dobbs, R., & Koller, T. (2016). Measuring long-term performance. Retrieved from McKinsey & Company: http://www.mckinsey.com/insights/corporate_finance/measuring_long-term_performance
Graham, J., & Smart, S. (2011). Introduction to Corporate Finance: What Companies Do. Cengage Learning.