The lounge in our old house is one of my favourite places to spend an evening. With the French doors flung open to the garden in summer. Or the fire blazing in winter. The 1,000-crystal chandelier — made in Italy, not China — dimmed to a soothing level.
At least until I wrecked the wool carpet. A soot stain from the fire. Then rubbed that with a little soapy water…What a fool! Damaging the pile. My wife was not happy.
But I like that stain. It reminds me of a critical life lesson: You can learn from experience. And from doing your homework first.
Had I thought to google how to deal with a soot stain before acting, things might’ve looked better.
When it comes to personal finance, there’s one area where you can ‘ruin the carpet’
I’ve seen it time and time again. Ironically, people ask us for help on investing. And all other sorts of financial questions. But once they embark on this path, they’re so convinced of their success, they never ask.
The path I’m referring to is starting a new business.
It’s the dream of many. And once they set up or agree to buy a business, they see only roses. Often fertilised by fee-hungry accountants and motivational authors.
Trust me, I’ve been in business for nearly 30 years. In my adult life, I’ve had a formal payrolled job for six months in total. I’ve started and been involved with more than 20 businesses. Only a minority have been successful.
Most businesses have many more thorns than they do roses. A small number of the very best businesses come to the public markets. And we study the best of those to invest in and try to garner growth and income out of.
Sadly, I’ve seen many people knocked back financially by starting the wrong business
Businesses, by their nature, gobble capital. They have overhead. You need to spend money, lots of money, to make money.
And as any investor knows, it’s very hard to get money to make money without taking your fair share of risk.
One of the first couples I saw lost loads of money in two ventures. Health products. And property management. They worked in IT and knew nothing of these industries. But they were convinced of outsized opportunity.
The money lost could have repaid their mortgage and kick-started a dividend-share portfolio to provide lifelong passive income. The time lost could have enabled them to learn about investing or other more profitable pursuits.
Then there was the engineer who entered the sports industry — even though he didn’t actually play the sport he pitched.
And the couple who bought a farm — after years focused on residential property.
Most industries are highly competitive, and it is difficult to extract a profit — even by those who have known their industry for years
The warning sign for many a struggling, failing business leading to capital loss is pretty clear. Entering a business you have no experience in. Or have not spent some time working in. Or have not researched in depth and experimented with in a low-cost way.
When it comes to investing in businesses on the share market, experience and acumen can go a long way. But you also have opportunity to study detailed public and audited records. Financial statements. Analyst reports. Industry publications. News stories.
Often, the best businesses are those that others cannot enter. They have moat. Some assets, position, technology, or IP that protects their profits and affords high margins.
The other thing we tend to find with high-performing companies, is they can achieve a very high return on the capital invested.
The other thing we tend to find with high-performing companies is they can achieve a very high return on the capital invested. This is something we look for in our Vistafolio wholesale portfolio management service.
I’ve had my share of failed businesses. That little patch in my lounge carpet reminds me to do my homework and know the potential damage.
Editor, Wealth Morning
(This article is general in nature and should not be construed as any financial or investment advice. To obtain guidance for your specific situation, please seek independent financial advice.)