Dateline: 5 January 2015
|Small-Town Coffee Shop|
I’ve mentioned here in the past that I think some of the best financial discussion on the internet can be found at the McAlvany Weekly Commentary. David McAlvany (son of longtime financial analyst Don McAlvany) seems to have a particularly thoughtful, historically-informed, and balanced approach to investing.
In the December 24, 2014 Weekly Commentary, David answers several reader’s questions about finance and investing. It’s all worth listening to but I found the following question and answer of particular interest. I’ll comment on it at the end...
“My family and I have saved enough to start a small business of our own. Nothing fancy. Just a small sandwich/coffee shop that serves good food and atmosphere. This has been a dream for us for years, and we figure we can create several jobs for young people and the local economy.
It’s supposed to be a win-win right? Well, our fear is what may happen to our business, and thus our savings, when and if the dollar collapses, and if there is financial havoc in our country. Is this just a really bad time to start any small business no matter what it is?
Should we just buy precious metals with our money and hold on until something bad happens to our economy and our currency? What if that day doesn’t come for years, or another decade or two?
We’re financially ready to become business owners but we’re really confused and terrified and don’t know what to do. Do you have any advice for people like us?”
“...[I]f you had your money in precious metals and were sort of waiting it out, there’s a couple of things to consider. .... Gold saw annual returns of 12-1/2% per year for over a decade, from 2001 to 2011.
[But] if you owned your own business in that time frame and were managing it well, managing costs, and had the variables necessary for success in play, you’re talking about compounded returns of 20% to 60% per year.
There’s no doubt that the best investment than anyone can ever make is in their own business. You will never see rates of return in the stock market, in the bond market, in the commodities market, consistently, at a level which you will in a business which you control.
Of course, you’re hitting on a variety of risks and concerns which are reasonable, and it’s difficult for me, not knowing specifics, to really parse this out”
From my perspective, I would hope that the future business owner doesn't put all his eggs in one basket (that's old agrarian wisdom). You should always have a backup plan, just in case.
Also, I would tell this person that starting a business is always a risk. It's always something of a fearful endeavor. There are no guarantees, even in a really good economy. If there were no risk (and little work involved) then a whole lot more people would start businesses, right?
But the point of this post is to relate to you the opinion of David McAlvany, that one of the best investments a person can make is in their own business... and he has statistics to back this up.
Again, from my perspective, I can relate to this investing advice. My own home business is far more profitable than any job I've ever had. For me to purchase inventory that can be sold, or used to manufacture products that I can sell, is a far better investment than anything else I can think of.
However, I can tell you that I have had business ventures in the past that did not make me a profit. They were financial failures. And the business I have now did not generate much profit for the first eight or nine years.
So, obviously, not every small-business is going to generate 20% to 60% compounded annual profit. But the fact that it happens is worth mentioning, and it is perfectly legitimate to think of developing such a business as a means of not only making money, but investing your money.
As always, I welcome your opinions and anecdotes.