How Does McDonald’s Make Money? An Important Lesson in Knowing Your Investments

How does McDonald’s make money? The first thing you’re probably thinking is that it sells fast food. It seems like everywhere you look, there are a pair of golden arches on the corner. However, if you think that fast food is the primary source of income for McDonald’s, you’d be wrong. This is a lesson in why it’s important to understand how a company makes profit.

McDonald’s Real Estate

McDonald’s is a real estate company. Yes, real estate. Harry J. Sonneborn, the first president and chief executive of McDonald’s, is famous for saying “We are not technically in the food business, we are in the real estate business.” This is because McDonald’s business model primarily relies on the real estate of their stores.

Basically, McDonald’s buys the properties that you see McDonald’s stores on. They then lease them out to owners at a huge markup to make profit. This technique is called ‘franchising’ and is used to grow a company at a quick rate. In fact, only 15% of the 36,000 McDonald’s restaurants are actually owned and operated by McDonald’s.

If you’re bored now, just hold on. You might be thinking “what does this have to do with investing?” Well, as a value investor, it is critically important to know how a company makes profit. If you don’t know how a company makes profit, it isn’t the company you should invest i n.

Invest in What You Understand

Warren Buffett, the most successful value investor there is, claims that he will not invest in a company that he doesn’t understand. This means that specialty companies that have complicated business models are off the table. However, this should be brought down to a micro level for us.

This is how I see it: if you don’t know how Apple makes money, don’t buy any shares of Apple. It’s that simple. If I can’t tell you how a company makes profit, I won’t be investing in them.

This is why it is important to thoroughly analyze a company you are going to invest in. You need to understand how a company makes money, and how much they make. This is the most basic understanding you need to have of a company as a value investor.

Think about it. Stock XYZ hits the market, and everybody is buying in. It’s a tech company that has the ‘next big technology.’ Because of this, you buy into the company, not even finding out how it makes profit.

After a while–could be a month, could be several years–XYZ folds because it was never making profit! This is what happened to a lot of people during the tech bubble in the 90s. Because of the hype, people bought in without checking to make sure a company was profitable!

Mix Profit With Fundamentals

Now, here’s a disclaimer. Investing in what you know and investing in something simply because you recognize the brand name are different. You shouldn’t invest in Apple because you  have an iPhone. Instead, you should be focusing on companies that you understand who have great fundamentals.

Fundamental analysis is an important component of value investing. If a company isn’t fundamentally sound, they usually do not make profit. Therefore, you need to pair a need for profit with your need for understanding how that profit was made!

Hopefully, this post helped you guys and gave you a quick lesson on understanding your investments. If you’re interested in getting started and haven’t yet, try joining our Insider’s List. We send out emails every week with exclusive content. Plus, you get a free value cheat sheet!

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