I was recently asked this question “how do you overcome the fear of investing?”
To overcome the fear of investing, I usually do the following steps:
1) Identify the cause of the insecurity.
2) Do research. Know more about the issue than when I started.
3) Analyze the potential outcomes.
4) Ask myself if I could live with the worst case scenario.
5) Take small steps to gain confidence (if possible).
6) Make sure you do proper due diligence.
Let’s take the example of a community newspaper purchase.
Many years ago, I was considering buying a community newspaper in South Florida. The newspaper was distributed for free to homeowners in an affluent community, and it made all its revenue from advertising. It had no classified ads or subscription revenue. It was a very profitable business and was priced fairly.
In order to purchase this business, my wife and I would have to invest all of our savings, mortgage our house and take out a substantial SBA loan. It would have been a big investment from our part. It is the equivalent of going “all in” in poker.
I really liked the business. However, I felt unsure of the purchase. It was very different being a consultant giving advice than when it is your own money. When your money is on the line it is more difficult to pull the trigger.
I overcame my insecurity by following the steps I described:
1) I identified the cause: I was concerned about putting all our capital in the business. Also, there were few tangible assets. If the business didn’t work, there wasn’t much to liquidate, and we would lose everything.
2) Do research: I researched the newspaper publishing business. Understood the key drivers and learned that it was a very profitable business. The research made me realize that I was capable to run and grow this business.
3) Analyze the potential outcomes. There was 3 possible scenarios:
a. Business is maintained at the same level
b. Best outcome would be grow the business, and exit with a significant profit
c. Business loses all clients and goes bankrupt (worst case)
4) Could I live with the worst case scenario, i.e. business shuts down? I figured that if the business went bankrupt we would have lost everything. But at the time I was in my early thirties and was confident that I could get a high paying job. So, my worst case would have been to go back to corporate America.
5) Take small steps to gain confidence (if possible). This wasn’t an option here. Either we bought the business or not. Sometimes, you can start small and grow. For example, if you are investing in rental properties. You could start by buying a single family home to rent out, and then grow to small apartment buildings, then to larger building and so on.
6) Make sure you do due diligence. Before buying or making an investment, monitor it. I looked at a full two years of editions of the newspaper we were looking at and counted the number of advertisers in each edition. I checked to see if it was gaining or losing advertisers. There is a lot more to due diligence which we will review in a future post.
After going thru the steps described, we overcame our fears. My wife and I ended up buying the community newspaper. We did very well with it. We converted it to magazine format and grew it to double the size and tripled the profits. After four years we sold it for a handsome profit.
Thanks for reading the eclectic investor blog. If you have any questions or topic you’d like me to write about please post them in the comment section.