When my friend Seth asked me to invest in his new wine store, the decision was easy…
He’d already answered the most important question you must ask before making an investment.
Most investors forget to ask this question. But as I’ll explain today, if you know how to answer it, you’ll set yourself apart from the crowd…
[ad#Google Adsense 336×280-IA]I got to know Seth while I was in medical school at the University of North Carolina at Chapel Hill and he was the wine buyer for a local grocery store…
He was educated as a chef and was working on his Master Sommelier badge.
(A “sommelier” or “wine steward” is the wine expert at high-end restaurants. You must pass an exam to throw around the snooty French title, and “master” is the highest level of certification.)
Seth always gave great suggestions for meal and wine pairings and would remember them months later…
As a customer, I could tell he cared about me, listened, and gave great advice (a spectacular combination). So when he approached me about backing his shop… I knew he understood wine and had a passion for it.
But what really sold me was the due diligence he had performed on the wine market in the Raleigh-Durham-Chapel Hill area. (The “Triangle,” as we Tar Heels call it.)
He talked to local restaurants. He visited other wine shops. He took notes. He even studied traffic patterns on the streets near where his shop would be. His business plan was detailed, thoughtful, and laid out different scenarios. He thought about the marketing and the customer experience in great detail…
And it was clear from the dividend he could pay me – along with the discount on wine I’d receive as a part owner – that I would easily get my capital back out of the shop in a short amount of time.
That’s the core question you must ask any time you think about investing your money.
Whether you’re loaning money to friends or family, acquiring land, purchasing gold coins, or buying a stock… You have to go in knowing how you will get your money back and how likely you are to recover it.
Backing Seth was an easy decision… Eight years later, the dividends I’m getting from a simple wine shop in North Carolina are providing me with a nearly 15% annual return (and lots of great wine at wholesale prices). By year 10, I can imagine doubling my initial stake every year.
The two-part question I’ve described is what’s known in financial circles as an “exit strategy.” This probably isn’t how most folks think about an exit strategy… I’m not talking about protecting yourself from the worst-case scenario.
When I talk about exit strategy, I mean knowing how… and how likely… I am to get my money back.
Most people never consider how they’ll get their money back. People speculating on the next hot stock tip, gamblers in Vegas, and even a lot of options buyers are usually hoping and praying to get a large chunk of money back at the end. But they can’t really say how that will happen… And they certainly have no grasp of how likely (or unlikely) that is. But it makes a big difference in the success of your investments.
When you invest your money, you can get it back in one of two ways…
1. You either get it back in a stream of income – as interest or dividend payments.
2. Or you get it back when your principal is returned to you – like when a bond matures, or when you sell your asset (whether it’s stocks, gold coins, or a beachfront condo). If you sell it for more than you paid, you’ve got a “capital gain.”
When I recommend ideas in my monthly Retirement Millionaire newsletter, I focus on both pieces of the puzzle… income and capital gains. Most of the time, I want to ensure stable income that will return capital while we wait for the potential growth that will result in capital gains.
So before you make any investment, know your exit strategy. Know exactly how you will get your money back.
Here’s to our health, wealth, and a great retirement,
Dr. David Eifrig
Source: Daily Wealth