Remember we invented a term for strengths-based investing, “strengthevesting,” which involves investing in your strengths. Here I take you through the principles behind it.
The Investor Is Always Accountable
You as the investor are accountable for the performance of your investments. If you find yourself blaming the economy or partners or anything else, you’re not taking accountability. It means you’re depending on too many external factors for an investment to perform for you. It’s a risky situation.
If an investment is going south and the only thing you can think of to do is to call someone to complain or to ask questions, it’s probably not the right investment for you. You clearly don’t know what you’re doing and how to add value to influence the performance of the investment.
Understand the Value Proposition
Understanding the value proposition is a simple matter of understanding how value is created for people with any particular investment.
The same investment can pose different levels of risk to different people because risk is equal to the difference in understanding of the investment’s value proposition. Understanding the value proposition of an investment means, in part, understanding who benefits from the transactions involved, and how this benefit is repaid. It goes far beyond just knowing the interest rate paid on an investor’s principal. Rather, it requires you to understand how a company uses your invested money to create value in the marketplace, how this value is perceived by potential buyers in the marketplace, and what they are willing to pay for this value.
How do users of the product or service benefit? What’s the impact on the marketplace? If you give someone money, how do they benefit? Never invest in something you don’t understand.
A simple way to test whether or not there is a clear and understandable value proposition is to explain it to a ten-year-old. If he or she gets it, that’s a good sign. If it’s too difficult to explain or if you or the 10-year-old are confused in any way, it’s probably the wrong investment for you.
Understand Supply and Demand
My 5 Day Weekend collaborator Garrett Gunderson learned this lesson years ago when he jumped on an opportunity to buy real estate in Las Vegas. The numbers looked great, but what was overlooked was that the market was getting saturated with rentals because most of the people buying homes were investors, not homeowners.
You have to understand the ratio of supply to demand in the marketplace in which you’re considering investing. Is there enough demand to justify the investment, or is there an oversupply of your particular product or service?
Have a Clear Exit Strategy
A lot of investments are easy to get into, but hard to get out of. You have to understand how you get your money back from an investment, and how you can become liquid, if necessary.
Never Invest on Emotion
Once you get into a position to invest, you’ll have no shortage of opportunities that appear sexy. It will be tempting to jump into things solely for a quick and big return. Exhibit robotic emotion- al detachment.
These opportunities are usually pushed by people urging you to make a decision immediately. If you don’t act fast, you’ll lose out. This is a red flag. Never invest on emotion. Make cool-headed, calculated decisions. Don’t invest in anything for the sole reason that it can make you a lot of money. Understand the bigger picture.
Don’t Diversify, Focus
A lot of investors think they need to be able to do 20 or 30 things. You really only need to be able to do two or three things really well. Instead of putting a lot of different types of eggs in your basket, put only a few types in one basket and watch them carefully. Stay within the realm of things you know and understand well.
Ask an Objective Third Party to Analyze Investments for You
One of the most valuable things you can do is to bring in someone who isn’t associated with the investment to help you perform due diligence. This person has no financial incentive to sell you the investment, nor does he or she have any emotional attachment to it. He or she will be able to provide objective, unbiased advice and help you to see potential blind spots that may be hid- den by your emotions.
In my next post, I’ll give you a helpful scorecard that will allow you to analyze opportunities for investment based on their strengths for you.
In the meantime, I’d love to hear about your personal strengths-based investment experiences. What has worked for you? What have you avoided – or what did you do that you learned from? Thank you for sharing.
Secure your copy of the “5 Day Weekend” book. 5 Day Weekend: Freedom to Make Your Life and Work Rich with Purpose [Nik Halik & Garrett Gunderson]