I talked to one of our DKAffiliatedTM accountants this past week about a few of our clients. One of our topics was how uncertain the investment market was these days for our clients. The stock market is up, down, sideways, down, up … in other words, it’s all over the place.
Real estate has had a downturn in most markets. Businesses are laying off people. Where can you find a good investment these days?
The answer is right in front of you.
Here are 5 tips that work in any market. Follow these you’ll have a better chance of making good investment choices:
(1) Invest in something in which you’re an expert. For me, I know a lot about taxes, not so much about gold mining. So, even though it might be a great time to invest in gold, I’m probably not going to buy into a gold exploration project. I don’t know what I don’t know and that can be dangerous.
(2) Do your due diligence. Just like you never want to buy a house you fall in love with, don’t fall in love with your investment. The purpose is to make money, hopefully in a way that is ethical and in alignment with your values and vision. But there still must be solid business principals behind the premise.
(3) Listen to your advisors. One of the best lawyers I ever had was someone others would call a deal breaker. He could always find every problem there was with a deal. I didn’t let him make the decision (that was up to me with full accountability) but I listened to ever single one of his problems. If I didn’t have a “worst case” solution planned (and not simply “that will never happen) for one of the objections, I didn’t do the deal.
(4) Plan for worst case. Plan for worst case, work for best case. Generally I find that the result ends up being somewhere in between. Sometimes I see clients just look at the “pie in the sky” best case and put their fingers in their ears and hum loudly when someone suggests anything different.
(5) Do a probability equation. Okay, breathe deeply. This isn’t going to be as hard as you might think. You’re going to have to make some assumptions though. Let’s say you have an opportunity to invest (isn’t it funny how it’s always an OPPORTUNITY to write a check?) in a new business or real estate deal. You are guaranteed a return of 8% and if it goes public, the promise of doubling your money.
So, the guaranteed return is 8% – right? Well, it’s not that simple, especially if it’s a new venture. First, let’s figure out what the chances are that you’ll get your money back. In this case (just assuming), let’s say it’s a new venture that is thinly capitalized. Best guess you have an 80% chance you’ll get your $100,000 back. Then, you think there is a 50% chance you’ll be able to get your 8% return and the going public play has a 20% chance of working out.
Your equation is more like: (80% * $100,000)+(50% * $8,000) + (20% * $100,000) = $104,000. You invested $100,000, so the return is only $4,000.
Now remember this isn’t the amount you’ll get back. This is simply used as a way of comparing returns from various investments.