The Business of Investing
The four rules you need to be a successful investor
One night, Robert and I had dinner with Dave Ramsey, a very popular personal money-management proponent. He looked at us and asked, “Do you know what the difference is between the two of you and the rest of us teaching personal finance?”
Not sure of what he was getting at, we shook our heads no.
He said, “You two look at everything through the eyes of an entrepreneur, including your investments. You look at everything as a business.”
Every investment is a business
Robert and I talked about Dave’s comment on the drive home. He was right. We view everything we do through the lens of entrepreneurship.
What exactly does that mean?
In the world of investing, it means that every investment is a business. It has its own income statement and balance sheet, must have sales and marketing driving it, must be profitable to survive, must have a team behind it, and must have a purpose for existing. These are the fundamentals of a successful business, and they are also the fundamentals of a successful investment.
Maybe at this point some of you are saying, “Yeah, but I’m just buying a few shares of stock. I don’t need all those things.”
Perfect example. What does every stock represent? A stock is a share of company. Does a company need sales and marketing, accurate financial statements, a strong management team, a purpose or mission, and a good revenue stream to succeed throughout the years? Of course it does! Yet how many people do their homework and research the fundamentals of the company they are investing in before buying a share of stock in that company? Very few. But I can tell you that Warren Buffett does.
The four rules of every investment
I have been an entrepreneur since 1984 when I started my first part-time business with no money and no experience. It was “do or die” through trial and error. Through the eyes of an entrepreneur, here are the investment rules I live by:
1. The investment must put money in my pocket
First, I look for cash flow. Second, I look for appreciation. Remember, a good investor is in the business of building her asset column. Any investment that doesn’t put money in your pocket isn’t an asset. It’s a liability.
2. The investment must stand alone
An investment cannot survive off the cash flow or funding of another investment. In the world of business, you cannot use the wealth of one business to keep a subsidiary business alive. Each business must be profitable in and of itself. The same is true for investing.
3. I want to control the investment whenever possible
In real estate and my businesses, I control the income, expenses, and debt. With investments such as privately-held businesses and commodities where I don’t control these things, I do my best to actively monitor and stay on top of what is happening. Never stop looking at ways to improve the investment and increase its value or the value it returns to you.
4. Every investment must have an exit strategy or exit options
The rule is: know when you will sell before you buy.
This may be based on price, date, certain market events, or personal events.
For example, Robert and I tend to hold onto our real estate investments and not sell. Yet, we know what it would take to sell. In 2006 when the real estate market was at its peak, we were offered an extremely high price for one of our apartment buildings that was operating at maximum cash flow. We sold that property and moved the profit into a larger apartment building that gave us a much higher return on investment.
Moving beyond average
At the end of the day, Robert and I have become very successful as investors precisely because we view each investment as a business. Most average investors don’t do this, and as a result, they have average results.
It takes a certain amount of financial education and IQ to look at investments this way, but in the long run, it’s extremely important to have and build this mindset. I encourage you to start growing your financial knowledge today and begin learning the ins and outs of viewing everything as a business.