When my friend Seth asked me to invest in his new wine store, the decision was easy...
He'd already answered the most important question you must ask before making an investment...
I got to know Seth while I was in medical school at the University of North Carolina at Chapel Hill and he was the wine buyer for a local grocery store... He was educated as a chef and was working on his master sommelier badge. (A "sommelier" or "wine steward" is the wine expert at high-end restaurants. You must pass an exam to throw around the snooty French title, and "master" is the highest level of certification.)
Seth always gave great suggestions for meal and wine pairings and would remember them months later... As a customer, I could tell he cared about me, listened, and gave great advice (a spectacular combination). So when he approached me about backing his shop... I knew he understood wine and had a passion for it.
But what really sold me was the due diligence he had performed on the wine market in the Raleigh-Durham-Chapel Hill area. (The "Triangle," as we Tar Heels call it.)
He talked to local restaurants. He visited other wine shops. He took notes... He even studied traffic patterns on the streets near where his shop would be. His business plan was detailed, thoughtful, and laid out different scenarios. He thought about the marketing and the customer experience in great detail...
And it was clear from the dividend that he proved he could pay me – along with the discount on wine I'd receive as a part owner – that I would easily get my capital back out of the shop in a short amount of time.
That's the core question you must ask any time you think about investing your money. Whether you're loaning money to friends or family, acquiring land, purchasing gold coins, or buying a stock... You have to go in knowing how you will get your money back and how likely you are to recover it.
Backing Seth was easy... Eight years later, the dividends I'm getting from a simple wine shop in North Carolina are providing me with a nearly 15% annual return(and lots of great wine at wholesale prices). By year 10, I can imagine doubling my initial stake every year.
The two-part question I've described is what's known in financial circles as an "exit strategy." This probably isn't how most folks think about an exit strategy... I'm not talking about protecting yourself from the worst-case scenario.
When I talk about exit strategy, I mean knowing how... and how likely... I am to get my money back.
Most people never consider how they'll get their money back. People speculating on the next hot stock tip, gamblers in Vegas, and even a lot of option buyers are usually hoping and praying to get a large chunk of money back at the end. But they can't really say how that will happen... And they certainly have no grasp of how likely (or unlikely) that is. But it makes a big difference in the success of your investments.
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When you invest your money... you can get it back in one of two ways.
- You either get it back in a stream of income – interest or dividend payments.
- Or you get it back when your principal is returned to you – when a bond matures, or when you sell your asset (the stock, gold coin, or beachfront condo). If you sell it for more than you paid, you've got a "capital gain."
When I recommend ideas in my monthly newsletter Retirement Millionaire, I focus on both pieces of the puzzle... income and capital gains. Most of the time, I want to ensure stable income that will return capital while we wait for the potential growth that will result in capital gains.
If you're looking for recommendations that can return both income and capital gains, my Retirement Millionaire subscribers can view our entire model portfolio here, along with specific buy and hold advice (look for the recommendations that say "Strong Buy").
And one of my favorite ways of making sure I always have an exit strategy with every single recommendation is by using a trailing stop. And there is no better way of tracking your trailing stops... and potentially significantly improving your returns... than with our affiliate company, TradeStops.
Porter Stansberry and TradeStops founder Richard Smith recently put together a special training session showing how this trailing-stops system can work hand-in-hand with my Retirement Millionaire recommendations... And the results are exceptional. Click here to view a replay of this training session.
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