What profit do you look for before you get interested in a deal?
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Lyndon C asked:
I’ve asked this question of “business people” and can’t get a straight answer. If you had $10,000 to invest, you could put it in the bank and get about 5% without any risk of loss. You could invest it in the stock market and would expect to get a historical long term return of 8-10%. You could buy real estate and expect a long term historical appreciation rate of 3-6%, and maybe the crazy returns of the last housing boom of up to 15%, with no risk of loss (not counting inflation) if you hold long term (recent study says if you hold real property for many years, the nominal value of the property has always gone up).
I’ve asked this question of “business people” and can’t get a straight answer. If you had $10,000 to invest, you could put it in the bank and get about 5% without any risk of loss. You could invest it in the stock market and would expect to get a historical long term return of 8-10%. You could buy real estate and expect a long term historical appreciation rate of 3-6%, and maybe the crazy returns of the last housing boom of up to 15%, with no risk of loss (not counting inflation) if you hold long term (recent study says if you hold real property for many years, the nominal value of the property has always gone up).
Instead of these relatively safe ways to make money, what profit potential do you have to see in order to invest in a venture? I’m talking about starting a business where you give up a paycheck or have to devote significant time as part of your investment. Or if you own a store, deciding to carry a new item. Or when bidding a contract, setting the price/profit.
WILLIAMS
January 8th, 2009 at 6:04 am
ARNULFO
20% is a good baseline for profit. Now some of it will go to others involved as well as reinvestment into the company. The profit can be great or a total loss. Basicaly, small business is a high risk/reward venture.
January 9th, 2009 at 2:39 pm
BYRON
First, there is a school of thought that says, basically, that your expected rate of return is closely correlated to your risk of failure. For instance, if the rate of return is 3%, the risk of not receiving the return is 3%. So, a 100% return on investment is likely to fail.
With that in mind, the venture you invest in should have a higher return than any other investment possible AND be likely to happen realizable).
Investments in bonds and t-bills are pretty likely to happen (something may happen to you, is more likely reason for failure). Stocks are a little better, and real estate better, but now more risk is in the equation. Tenants may trash the place, flood, etc. It becomes less realizable.
If you give up a pay check (pretty ‘realizable’) and pursue a venture, you’d what a possible return to include the money you forgo as a paycheck AND adjust for the probablility of failure. Lets say you make $100,000 a year and want to be your own boss. There is a 50% chance of failure. So the business venture should have a realizable profit of at least $200,000 (actually, more based on a gaming logarithmic function I won’t go into). It may actually be best to have a number of smaller ventures with higher ‘realizability’, but lower ROI’s. This is what you are toching on with owning a store.
Bottom line: the best investment is the one that has a better return and is the most realizable.