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Is That a Legitimate Shot at a 200% Gain? Or Just a Headache?By
Thursday, January 5, 2012
"Steve, you've got to think of every one of these deals as buying another headache... Do you really want THIS PARTICULAR headache?"
My friend Brad Thomason gave me that advice a few years ago, and it stuck.
I'd asked him for his advice... I was interested in a tiny property investment deal that I thought was a "slam dunk." I called Brad for his advice because he sizes up thousands of potential property deals similar to this one each year.
Based on Brad's advice, I didn't do the deal. And I'm sure glad I didn't...
If I'd done the deal, I would have been taking on a big headache that, in the long run, really wouldn't have been worth it...
While the return percentage would have been high, the actual dollar return wouldn't have been that high – particularly considering the amount of time and effort I would have needed to put in.
And that's the crucial point.
I've repeated Brad's advice to myself ("Do you really want THIS PARTICULAR headache?") many times since then... and I've kept myself headache-free.
Brad and I met up yesterday on the courthouse steps of a county auctioning off distressed real estate.
Dozens of properties sold... But we didn't bite on anything. The best property sold had a tax-assessed value of $266,000 – and it ended up selling for $40,000.
Buying a $266,000 property for $40,000 sounds like a good deal to me. It seems like you could have potentially made a 200% return on that property.
Brad didn't bid on it. And he didn't lose any sleep over it. In his case, he didn't need THIS PARTICULAR headache. That deal would have been a small one for his business. It was nowhere near his office or any of his other operations. So he decided he didn't need to spin his wheels on it.
I thought it showed restraint and judgment on Brad's part... He could have made a big percentage return on his investment. But for his actual business, it wouldn't have been that big a dollar return, relative to the time and effort required. So he passed.
The best investors and businessmen I know fully understand this idea, and they implement it every day. They know which particular headaches are worth taking on.
I remember a publisher in my industry telling me (more than once), "Steve, that's a good idea... But since it won't make $500,000, we can't spend our time on it."
He wasn't being arrogant or condescending... He is simply a keen businessman. He understands the value of his time and the value of his employees' time. This publisher had the restraint and judgment to know it was better to either improve my idea or find a bigger one, rather than waste time on a smaller idea.
I also worked for a billion-dollar New York hedge-fund manager, and he understood this concept. My marching orders were simple: Find any investment idea that can potentially make a profit of $25 million or more.
Easier said than done! But by having this mandate, the fund manager didn't end up with 1,000 little investment ideas to watch. Instead, he ended up with a couple dozen ideas that he got to know REALLY well.
The point is, just because an investment could make you a big return, doesn't mean you should do it.
Remember that each business deal or investment you enter into is another "headache." It will require effort to monitor and move forward. You have to ask yourself if this is the particular headache you want.
Brad passed on the $40,000 deal yesterday. That will keep his head and his time clear for a larger property deal closer to his home that he's excited about, one that could net his fund $1 million-plus in profits over a couple years. I saw the publisher I wrote about pass up on certain profits as well.
They both were smart to do it...
The best investors and businessmen I know have a remarkable ability to say "no" to many likely profitable ideas, simply because they're not worth the headache.
Once you take on this mindset, you'll find that actual deals that are worth your time and hassle are rare. You'll learn to take on projects only when they're really worth it... And you'll have the energy to make those deals count.
Where are the deals now?
Longtime DailyWealth readers know I think there's tremendous opportunity right now in cheap real estate. Over the last few years, I've come close to buying on a lot of deals... But I've passed on nearly every one of them so far. Why?
I'm looking for just the right headaches... I haven't found 'em yet. But that's OK with me.
Good investing,
Steve
Further Reading:
For more on the "skip the headaches" idea, read this essay from Doc Eifrig. He's shown his readers how to avoid worry and wasted time... and focus only on the best opportunities. This strategy has booked Doc's readers seven double-digit winners in the last three months alone.
Famed money manager Jim Rogers encapsulated the same idea in one if his best quotes. Find it here: The Best Thing Jim Rogers Ever Said.
Market NotesOUR BIG CHEAP TECH IDEA IS WORKING In a market struggling to gain ground, our "Big Cheap Tech" idea is proving its worth.
In late 2010, Steve noted how many of America's elite, blue-chip tech companies were trading for extremely low valuations after taking their huge cash hoards into account.
Back then, blue chips like Intel were selling for less than 8 times earnings... and paying substantial dividends. In a world full of risk, owning these giant, stable dividend payers is one of our favorite ideas. (Massively increasing the income you collect by selling calls and puts makes the idea ever better... Read about it here and here.)
As you can see from today's performance chart, owning Big Cheap Tech is a winning strategy right now. Our chart plots the performance of three stocks Steve mentioned – Google (red line), Intel (blue line), and Apple (green line) – versus the benchmark S&P 500 stock index (black line). These Big Cheap Tech firms are all up over the past six months... while the broad market has lost ground. Owning the best at the right price works again.
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