(By NEIL PATEL)
“The issue with this is that not all business models are profitable. Even if a business has great growth, it doesn’t mean they will be able to turn a profit in the future. You need to analyze the business to make sure their margins are good and that they have a potential to turn a profit in the future.“
Have you ever read a story on TechCrunch that talked about how some angel investor made a few million bucks investing in a hot startup like Dropbox or Airbnb? And when you read all of these stories, what does it make you want to do?
I got into investing years ago because I thought it was sexy and all of the cool kids were doing it. When I first started I lost a lot of money, but eventually I figured out how to make money.
Before you start throwing your cash around, here are a few things you should keep in mind:
Invest in what you know
Warren Buffett has a great investing rule, in which he only invests in things he knows. If he doesn’t understand the business, he doesn’t touch it.
I took a much different route when I first started, in which I invested in whatever I thought was sexy. A lot of those sexy businesses seemed cool, but they lost me money.
You should only invest in things that you know. If you want to start investing outside of your knowledge base, that’s fine as long as you are willing to lose some money to learn a new space.
Don’t get too greedy
When it comes to making money, I used to be one of the greediest people out there. I always wanted to sell during the peak and if I didn’t time things right, I would get upset.
Because of my greed I lost money in a few cases when I could have made money. Guaranteed money is always better than potential earnings.
It’s very difficult to maximize your potential earnings. If you have an opportunity to cash out on one of your investments, and you would be happy with the return, take it. You can’t predict the future, so unless you have data to show that you should keep the investment, sell it if the price is right.
Profit is more important than revenue
The biggest investment mistake I used to make was that I invested based off of revenue growth. If they had great growth, I would instantly write a check.
The issue with this is that not all business models are profitable. Even if a business has great growth, it doesn’t mean they will be able to turn a profit in the future. You need to analyze the business to make sure their margins are good and that they have a potential to turn a profit in the future.
There is nothing wrong with investing in high revenue companies with fast growth, but you have to make sure their business model has the potential to turn a profit in the future.
Ideas are a dime a dozen
It doesn’t matter how good an idea maybe, if the team behind it sucks, the business won’t go anywhere. Do yourself a favor and don’t invest in ideas… invest in people.
In an ideal scenario a business should be a good idea, it should be run by awesome entrepreneurs, and by a team who is fast at executing. If you can’t find an investment that fits that criteria you should reconsider the investment.
Companies typically pivot from their original business model they original thought would do well. They will have to adjust their strategy and come up with new ideas. But if the team isn’t good, you’ll lose your money because they won’t be able to pivot.
You make money on the buy, not the sell
It’s rare that someone is going to pay more than market price for something. For this reason you should try to get the best possible deal when you first make the investment.
And if you think there are no good deals, think again. There are always good deals, you just have to search for them.
For example, I was able to pick up a penthouse condo in Las Vegas in the highest rated building on the strip for only $250 a square foot. All of the other comps where showing that people were paying a bit more than $600 a square foot.
I know the deal may seem too good to be true, but the developer wanted to move the inventory so they sold all of the penthouses to a group who could buy them all… I happened to know one of the individuals so I was able to pick one up.
I now have the option to sell that unit for $350 a square foot and it hasn’t even been 30 days since I bought it.
If you hunt for good deals, you will find them. As an investor you have to keep in mind that you are only as good as your last deal. So make sure you choose them carefully.
Don’t spread yourself too thin
Both from a financial standpoint and a time standpoint you shouldn’t spread yourself to thin. I currently have over 30 investments because I used to take a spray and pray approach with my investing.
The issue with this is that investments aren’t as passive as you think. The more time you spend on each of them, the more likely they’ll succeed. So if you have 100 investments, it’s very likely that you won’t have time to help most of them.
And from a financial perspective, many of your investments will require more capital in the future… even if don’t seem like they will it right now. You should always keep a good portion of your cash in the bank incase you have to dump in more money into some of your investments.
A good example of this is a realtor named Neil Schwartz, who owns dozens of rental properties in California. During the recession most real estate owners got in trouble because tenants couldn’t afford to pay their rent and property values plummeted. Neil did well during this time because he was sitting on enough cash to continually pay the mortgages on his properties when they were sitting vacant.
Don’t put all of your eggs in one basket
If you are just starting out and you don’t have a lot of cash, sure put all of your money into 1 business… because that’s what can help you become rich. But if you already have built up a nice nest egg spread your money out into multiple investments, this way if one goes wrong, you won’t lose all of your cash.
But you already know that.
What I really meant by “don’t put all of your eggs in one basket” is that you need to diversify your risk profile. Don’t only invest in risky investments or safe investments. Make sure you spread your money out in different risk profiles.
I used to only invest in revolutionary ideas that are likely to produce big returns, but those ideas are really risky and most of those investments will fail. It doesn’t mean that you shouldn’t invest in big, bold ideas, but you should also invest in safe bets.
These days I have my money in real estate, Internet companies, the stock market, and a handful of other sectors.
Hopefully you wont make the same mistakes I’ve made because it lost me a bit too much cash. I eventually learned how to pick better investments over time, but hopefully you don’t have to waste a lot of time and money like I did.
In addition to that if you want to get into the investing game, make sure you do it only if you are willing to continually make bets over the next 5 or 10 years. Investing isn’t a short-term game and over time you’ll be able to increase your odds of succeeding.
What other mistakes should you avoid when investing?
“Opinion pieces of this sort published on RISE Networks are those of the original authors and do not in anyway represent the thoughts, beliefs and ideas of RISE Networks.”