5 Ways You can Achieve High Returns with Low Risk

You are led to believe that you need to take risk to achieve high returns. But that couldn't be further from the truth.
Here are a few low risk investment ideas worth considering.

1. Focus on an existing business
Look at businesses with long history of operations that you can analyze. This is much less riskier than a startup.
Take UFP Technologies UFPT for example.  A packaging company in a small niche market with a major turnaround from 2005. Free cash flow has seen huge increases and for every $1 in sales, converts 4.6c into FCF. That is a business capable of generating cash.

2. Buy simple businesses in industries with an ultra slow rate of change
Buffett tells us

“we see change as the enemy of investments…so we look for the absence of change. We don't like to lose money. Capitalism is pretty brutal. We look for mundane products that everyone needs.”

In this fast paced, ever changing world, a company such as Johnson and Johnson JNJ selling goods such as Band Aid and baby oil is as slow to change as it gets. Recent drug recalls has provided the opportunity for dividend investors, the ability to buy this great company. For every $1 in sales, JNJ converts 20c into free cash flow due to its huge margins.

3. Buy distressed businesses in distressed industries

“Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives it good results.”

Much more difficult for the retail investor but companies such as Dollar Thrifty Automotive Group DTG has shown how it is possible to go from $0.80c to $48.
A more recent example is Tuesday Morning TUES. The company was selling below its Net Current Asset Value and with improved guidance, the stock soared to $5.

4. Buy businesses with a moat

“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products and services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”

Not all companies have a competitive advantage. Companies such as Groupon has no moat. Nobody knows how the company will remain competitive as more copycat sites appear or the newest trend turns to something else.

5. Bet heavily when the odds are overwhelmingly in your favor
For companies selling less than their asset value, the odds are already aligned in your favor. Ensure that such companies are not bleeding cash and has a viable business and the odds are in your favor.

Gravity Co GRVY is one such example. A Korean online role playing game company selling at Net Current Asset Value. The company is cash flow positive and has short term catalysts of their much anticipated sequel game coming up mid year. The market has refused to price in any future prospects. A great opportunity for the stock to explode when the game enters the market.

You too can achieve High Returns with Low Risk

These 5 tips are simple value investing principals that you cannot go wrong with. Don't believe me? I've been able to record a 48% annualized return by utilizing such methods. Of course, past performance is not a guarantee of future performance, but the truth is you do not have to fall victim to the myth that high returns require high risk.

Disclosure: Long GRVY

Jae Jun runs Old School Value, a value investing service providing free investing spreadsheets as well as premium stock valuation calculators, stock analysis and value stock screens for the DIY investor. He writes a weekly Tuesday column for Benzinga.