Reader Question: What’s the secret to making ‘great’ investments?

Last week, I was speaking to a colleague about investing and why he\’s not riding a Rolls-Royce when he spends so much time saving and investing. Once I\’d stopped laughing at the idea of driving a Rolls (although I think they\’re classy vehicles, I think they\’re a horrendous misuse of capital!), I asked him what he was trying to get at with his question.

What I\’m asking is why I\’m scrimping and saving to put £200 a month into a savings account – I have been for years – and why after so many years my bank account is still in the 4-figure range, not the six or seven figures that I aspire to.

You\’re always talking about deals you\’ve done – what is it that you\’re doing differently to me? What is your secret to making great investment deals?

This question didn\’t surprise me, as it\’s something quite common to a lot of people. They\’re saving every last penny they\’ve got, but after a few years, they start to question whether they\’re ever going to have any seriously significant cash in the bank. It seems common sense, but giving your money to a bank or financial advisor isn\’t likely to turn you into a millionaire. If you manage to get a return of 5-7% (especially in the current market), you\’d likely be pretty content.

The thing is, I consider savings accounts to be safe, but thoroughly average vehicles for building wealth. If it were possible to make serious wealth through a savings account, we\’d all be flying round the world in private jets and driving Rolls-Royce cars (although rampant inflation would probably have ensured that didn\’t happen).

Because of this, I\’m regularly asked what the \’secret\’ is to making great investments. To me, it\’s about being willing to try new ideas, to analyse fundamentals and to control emotional responses to invest for a suitable time frame (note that I say \’suitable\’ – you can make just as much money flipping houses over three month periods as you can investing in a successful company for twenty years).

If you look at many of the world\’s wealthiest individuals, many of them placed their capital in the hands of skilled entrepreneurs (sometimes themselves), who then went on to achieve success with that capital. I\’m not just talking about companies like Facebook or Berkshire Hathaway either – these are real random opportunities which rely largely on luck of geography (if you lived in the middle of Africa, you\’d never even have heard of Berkshire until it was already too expensive to buy into).

These opportunities are rare and hard to invest in for the everyday investor. Despite this, there are many other incredibly talented entrepreneurs and business owners who have potential and a proven track record of churning out good returns for an investor. To make matters even better, they\’re often in your local community – you just haven\’t found them.

When I look at some of the wealthiest people I\’ve met, they\’re all business owners and entrepreneurs. Some have traditional bricks and mortar businesses, others have real-estate development companies, but without exceptional, all are far wealthier than those that have a corporate job.

So my \’secret\’ to making great investments is simple;

Invest your money with entrepreneurs

Any skilled investor will tell you that returns of just 7% are peanuts when compared to investing with entrepreneurs. Many mutual funds and investment trusts fail to reach even that level once fees, commissions and holding charges have been levied on returns.

Of course, it can be a risk to invest with entrepreneurs. The majority of start-ups fail within three to five years, and an investor could lose all of their capital. That\’s why carrying out due diligence is so important!

So many people consider investing with entrepreneurs to be a \’high-risk/high-reward\’ type venture. I couldn\’t disagree more. Not all businesses are the same, and painting all of them in the same light is just intellectual laziness. Depending on the deal, you could lose money, make money, or just about break even. The risk lies in your ability to understand and mitigate the potential dangers to your capital.

By ensuring sufficient collateral for your investment, either through personal gaurantees, real estate or other hard asset, you can vastly improve the security of your investment. And thinking about it, when was the last time your financial advisor told you that if he lost your investment, he\’d give you your house?

 

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