One Of The
Best Investments?

Dateline: 5 January 2015

Small-Town Coffee Shop
(photo link)

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”

There is more to David McAlvany's answer. He goes on to mention the basic and essential importance of having a good location. And he make the point that having the right staff is critically important.

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.


Toirdhealbheach Beucail said...

Herrick - I think it is largely dependent on 1) What the business is (specifically, what the market is) and 2) How one is going to work it.

For the the business and market demand, I have had the experience of having and losing a business - not because what we were doing was unprofitable but that the market for it (at that time, commercial real estate out-of-state) was not there. We simply could not sustain the long periods it took to close a deal.

For the second (how are you going to work it), that is something each individual decides. My wife has had two home based businesses - in one, she made money but "reinvested it" all in additional product (she liked the product) and thus we did not make any money. In the second, she worked it like a business and did, in fact, make money.

I will say that it is probably easier than ever to find a market with the Internet so there are definitely possibilities - but having lost a great deal of money, I would still be cautiousl

John D. Wheeler said...

I would say starting your own business always produces a large return, in experience if not in money. The trick is to keep yourself in a position to put the experience you get to good use.

Matthew said...

A couple thoughts from personal experience about investing and not "putting all your eggs in one basket".

-Diversity is crucial in ALL businesses. My wife and I own and operate a small farm. We sell beef, chicken, turkey, eggs and occasionally lamb. We also make (and sell) homemade soap and body products. Within that product area we sell nine different product types. I also do construction and the occasional auto repair. We can drop or lose any one or several of our products without hurting or killing the business.

-Also important to remember is avoid debt like a crazy person. Because our business carries no debt other that our land, we could shut down our business at anytime, liquidate our assets and walk away debt free.

-Learn learn learn! The more your know, the less vulnerable you are to just about everything. This is another facet of diversity. Due to my range of knowledge, as a working adult for 17 years now, I can't remember being out of work more than several months sum total. Nearly everyone I have come across that either lost their business or has been unable to find a job was due to violating the principles of debt or having such a narrow range of knowledge it limited them to a very specific career. Keep in mind, knowledge CANNOT be taken from you, but tangible stuff can!

As a side note, there was a blog post here several weeks ago about what to invest in. One of the main things we do to invest is keep an eye on craigslist, yard sales and auctions. For various reasons, there are items there that are below market value. We have a couple rules though - its not a free-for-all (unless you want to lose money buying stuff you don't need). The first is buying stuff you need anyway. Second is know the item you are purchasing. And lastly, know the new and used market price for the item. This strategy is especially useful during inflationary periods (as the buying power of money goes down, there is a corresponding rise in the value of goods). An excellent example of this is an item we bought at a garage sale several years ago. We got a BCS rear tine tiller to use in our garden. New these run about $2500 an up. Used about $800 and up. We paid $175. This was a great investment because:
-we needed and could use it
-even though we weren't looking for one at that specific time, I was quite familiar with them. I grew us using a couple that my parents owned. -the price was no more than what I would have paid for a fairly basic used model from any other manufacturer. These are the kind of deals to invest in. I know of several people that ignore rule # 1 and buy strictly as a means to invest, but they don't violate rule # 2 and 3.


Anonymous said...

Having had a profitable restaurant I can tell you that many (MOST) go out of business the first year. One of the main reasons? Too many offerings. 300 gazillion things on the menu. Must keep ham in stock even though no one has ordered it in two weeks because it's 'on the menu.' BAH!!! Keep it simple. Mine was a blue-plate diner that also served breakfast. So breaky & lunch. No dinner run. You could order a grilled cheese a HB or CB or eat the blue-plate. That was it! I made money and we ate the leftovers at home and I was home by 3! I also did catering on the side - full blown dinners for 500+ or a pie or a dozen cupcakes order for one. ~Sassafras

P.S. Besides friendly staff & hot coffee all the time, the other trick for a successful diner? Don't over-season/spice your foods. You or the patron can always add more, but you can't take it out once you've overdone it! ;) A start up in these times where you're buying equipment from scratch? Uhhh, I'd surely only go in about 50% of my funds and tuck the 25% back for 'contingencies'. They'll come up! The remaining 25%??? Invested in something else!

Herrick Kimball said...

Great comments. Thanks for adding to this topic.

My youngest son works as a cook at the local diner. He has dreams of starting his own business some day. I'll have him read these comments, especially from Sassafras. Home by 3? Amazing. But you started work at 1:00 AM every day, right? :-)

Anonymous said...

Nope. I left home at 6:30 (always been an early riser since being raised on an egg farm) started at 7:00 and worked thru till about 2:30 and drove home. Home by 3:00. This was ideal for me as a young newly married woman w/no kids - inside an office building. Most folks had gone home so no need for a supper run. I could be home w/a hot supper for my husband and still have time to clean the house before he got home. I did invest in vending machines that stayed 'on duty' after hours. Today a person can find lots of good deals on Craigslist. How about a used food truck for a good run at the rest. biz? Move to where the action is...mfg. plants w/30 minute lunch breaks, ballparks, soccer games, weekend festivals, etc. ~Sassafras

SharonR said...

Proverbs 14:23King James Version

"In all labour there is profit: but the talk of the lips tendeth only to penury."
"penury: extreme poverty; destitution"

Anonymous said...

The only rule of starting your own business that you need to know was stated repeatedly on the movie Robots: "See a need, fill a need."

You can always tell someone who will fail at starting a business if they say "_I_ have a dream" No, no, no! Nobody gives a fig what YOUR dream is. You need to find out what THEIR dream is then figure out how to give it to them.