What Does Return on Investment Mean?

“Return on investment” is a common term in public and an even more common term in the business world. So, what exactly are returns on investments, and how do they work? Read along as we cover this relatively simple concept that can make or even break those involved.

Basic Definition

In virtually every person’s life and on a daily basis, investments are made. By reading this article, you are investing your time and perhaps some electricity to power your reading device. Going to the grocery store is an investment in food and other personal supplies. Even simply helping a friend in a time of need is a way to invest in that person as well your friendship with them.

Now, on the return side of that investment is the actual effect of the investment, or what you stand to gain as a result of it. Per the examples above, by investing in reading this article, the return on your investment is a quick learning experience. By shopping at the grocery store, the return on your investment of time and money is a home which is stocked with the exact things you need. Likewise, the investment of your time and energy in that down-and-out friend will also likely bring you returns of a strengthened bond and trust.

Business Investment, Returns

We’ve taken a look at some of the ways in which an individual may invest and receive attributed returns on those investments. Now let’s take a quick glimpse to the business world where this concept in concerned. In short, the business world completely revolves around profitable returns on investment. Without the driver of profit, businesses don’t operate.

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Every decision in business revolves around getting the best returns possible. In the business of finance and investment specifically, the importance of investments and profitable returns is even more pronounced. When a lender lends out money to a business, a government, or even an individual, their ultimate goal and hope is to eventually be paid back and even make some money in the end. If this return on investment isn’t regularly accomplished, the lender will fail.

Real-Life Examples

What better way is there to demonstrate such a topic than through some real-life events?

The Brown Family was just an ordinary couple trying to makes ends meet out of college. Today though, they are worth millions. How did they do it? Helen and Jeff Brown became lifelong investors, and their returns eventually totaled millions of dollars. As of now, they are said to be continuing their success via investments in stocks, bonds, and cash.

While there are plenty of success stories to be shared such as that of the Brown Family, there are also plenty of non-success stories of ill-advised investments or those which simply just go wrong. Surprisingly, one of these comes from investing magnate Warren Buffet himself. According to Buffet, his life’s biggest mistake was his investment, or purchase as one could call it, of Berkshire Hathaway, a quickly failing textile mill. While this company did end up successful with time and Buffet’s investment, he sorely admits to many that had he actually invested in a better chosen venture at the time, such as insurance, he would be twice as wealthy as he is now. In terms of opportunity costs, this is quite the loss acknowledged.

Everything we do, as individuals and as business professionals is about the promise of return. Whether you are Warren Buffet or an unheard-of up-and-comer from the backwoods of Idaho, these parameters apply to us all. These are the basics of what the term “return on investment” means in the business and the non-business worlds alike.