In business one of the most important decisions is the decision about how to invest your hard earned money. Knowing that higher risks will need to be compensated by higher yields, and little risk means little return is the starting point, but how does a “good investment” really look like?

Warren Buffet, perhaps the most successful investor and one of the world’s richest people seem to be a great mentor. Let’s see how his investment strategy looks like.

Asked “what makes a good investment” at the Annual general Shareholder Meeting on May 1^st 2010, he said:

“High returns on capital (12+ %) with businesses requiring small amounts of incremental capital.”

Makes sense but let us think about it for a moment. When you can get 2 % interest by putting your money in the bank, which is the safest form of investing, you would want considerably more yields if you invest your money in more risky ventures such as a company, stocks or a turnaround case. How much more – that’s really up to you and your personal attitude towards risk and compensation for risk taking. Some investors might not bother to consider anything less than 5-6 times the bank interest rate, while others are happy to get twice the interest rate and others might only be satisfied with yields of a multiple magnitude.

It also depends whether you are looking to invest short term or long term. Turnaround cases that take a company from a loss to profit within a horizon of 2 years can be a very sexy investment, promising disproportionally high capital gain, while long term investments with a focus on stabile dividends can satisfy another investment strategy.

For Warren Buffet the threshold is 12% - which seems reasonable. “Requiring a small amount of incremental capital” is also sound advice. After all, what’s the point of investing if without such investment; the targeted organisation would not be able to produce return?

Warren Buffet: “Wonderful businesses don’t soak up capital to generate return”. Words of wisdom. “The management must be intelligent and the business must be widening its mote ensure future barriers to entry, and thus sustain a long-term competitive advantage.”

On generating returns via debt rather than equity, he has the following advice: “You can know enough to lend money to a business but it may not be enough to buy the business”. With a return on capital of 15%, he is not complaining. He reiterated that holding equities for the long term delivers a higher return than five, 10 or 20-years bonds.