October 6th, 2011 David Finkel (Taxloopholes.com Advisor)
We were floored by the feedback from yesterday’s post on building wealth independent of your business. I guess my three suggestions and the examples I shared really struck a nerve with a lot of you. I decided to come back to that same topic and share 7 more important tips on building wealth independent of your business.
1. Risk comes from not knowing what you’re doing, so pay the price to learn what you’re doing! Sounds obvious I know, but most business owners I know are ego driven and uniformed investors. As you can imagine this is an explosive combination. They tend to let their business success blind them into thinking that they know more than they really do.
2. Make sure you’re investment plan matches the financial stage you’re at. I made this mistake and it cost me millions… When I sold my first two companies I got a LARGE wire transfer from my buyer. What I now know (having paid the price to learn) is that I needed to invest in passive residual producing cash flow investments, not in non-cash producing “capital gain, forced appreciation” deals. But I did what I was used to doing and as a result, I made several investment missteps.
Be very conscious that your investments must match your current financial situation, don’t just follow your old plan that got you to your current position. Even if it worked brilliantly it may no longer apply to your new situation.
3. A portion of your investment portfolio must hedge your risk in your current business. That means that a percentage of your investment portfolio is something that will either do well if your main business has a downturn, or at the very least is insulated from any industry or macro-economic stress that impacts your business.
4. Do your due diligence BEFORE you invest. Due diligence costs in the hundreds or thousands of dollars. The price of NOT doing you due diligence is in the hundreds of thousands or millions of dollars.
5. If the deal cannot afford the lawyers, don’t do the deal. Always have your attorney and CPA (and if possible your mastermind group) give you their objective input before you make the investment. And make sure your attorney reviews all the deal documentation before you sign! Seems obvious, but I see the consequences of business owners who skip this step.
6. Concentrate your investments in fewer, better deals. There is a cost to every deal, make sure your deal is meaningful enough to merit the time, focus, and expense. The wealthiest people believe in concentration of capital. Sure they diversify, but not with hundreds of smaller investments. You can hold 5-10 investments and still have the needed diversification. How can you really do 100 great investment moves? And look after them after you’ve made them? It’s too much. Concentration of capital is the name of the game (with diversification in 5-10 great investments you know and understand.)
7. Buy America while it’s on sale. This is a quote from a friend and guest Maui Advisor David Stech. David’s point is that there has never been a better time to buy great assets cheap than you’ll see over the next 24 months. I guess you could call this the upside of a very challenging economic climate we’ve been dealing with for the past few years.
I hope you put these 7 tips to great use in your financial life.