I like to think I’ve got a good intuitive sense of optimizing my investment dollars, but when people ask me how to apply sound investment principles to their potential investments I find it hard to give more than simple equations I do in my head or scratch out on paper. I also caution people to “review your opportunity cost”.

I think the notion of opportunity cost is critical to investment success. Namely, what opportunities from “plan B” investment are you foresaking to invest in plan A?
My favorite investment shortcut is to simply look at the cost of borrowing X dollars vs the expected return on the investment over a very short and a medium term (5-10 year) horizon. If the expected return is close to the cost of the money (or less than that cost which is now about 8% via equity lines) I generally see it as a bad deal.  However, if the expected return is immediate with long term prospects even brighter, such as a rental property with positive cash flow in an appreciating market, then I’m inclined to sign myself up.

Vastly complicating matters are taxes, which vary so much by person, state and circumstance that a great investment for me may be a terrible one for you, and it can even be true that a great investment on December 31 is a poor one on January 1. Due to progressive taxes you need to accurately predict future income (hard) and future tax rates (impossible) to know how all the money will shake out even after a few years.If you are reasonably solvent and can borrow reasonably large sums of money the number of potential investments is enormous, though I generally operate on the assumption that “great investments” are few and far between and bad investments are as common as junk emails. I’m amazed by how many people are sucked into the type of investments (e.g. real estate timeshares) that involve high priced sales staff and expensive pitches, because these generally offer some of the *worst* returns on your money, often even negative returns. Those salespeople need to eat, and in many cases they just ate your lunch. The silly charts that show these as good investments usually avoid the concept of the “present value” of your money (money today is worth FAR more than future money due to interest compounding) and inflate the appreciation rates.

In Hawaii we dragged the kids to a Maui timeshare presentation so I could save $175 on some tickets and I was floored by the intensity of the presentation, which would have included a flight over to Maui had we let it continue (a “free” flight if you bought the timeshare, otherwise we’d have been charged).

We did the same thing in Tennessee timeshares in the Gatlinburg area to save a large amount on Dollywood tix and they were not quite as intense but still had the funny charts which, by ignoring present value and opportunity cost fundamentally distort the investment analysis.

wow, this post got too … long…