Have you ever read a story on TechCrunch that talked about how some angel investor made a few million bucks investing in a hot startup like Dropbox or Airbnb? When you read all of these stories, what does it make you want to do?
I got into investing years ago because I thought it was sexy and all of the cool kids were doing it. When I first started, I lost a lot of money. Eventually, however, I figured out how to make money.
Before you start throwing your cash around, here are a few things you should keep in mind:
Invest in what you know
Warren Buffett has a great investing rule: he only invests in things he knows. If he doesn’t understand the business, he doesn’t touch it.
I took a much different route when I first started. I invested in whatever I thought was sexy. A lot of those sexy businesses seemed cool, but they lost me money.
You should only invest in things you know. If you want to start investing outside of your knowledge base, that’s fine as long as you are willing to lose some money to learn a new space.
Don’t get too greedy
When it comes to making money, I used to be one of the greediest people out there. I always wanted to sell during the peak, and if I didn’t time things right, I would get upset.
Because of my greed, in a few cases, I lost money when I could have made money. Guaranteed money is always better than potential earnings.
It’s very difficult to maximize your potential earnings. If you have an opportunity to cash out on one of your investments and be happy with the return, take it. You can’t predict the future, so unless you have data to show that you should keep the investment, sell it if the price is right.
Profit is more important than revenue
The biggest investment mistake I used to make was that I invested based off revenue growth. If the potential investee had great growth, I would instantly write a check.
The issue with this strategy is that not all business models are profitable. Even if a business has great growth, it doesn’t mean it will be able to turn a profit in the future. You need to analyze the business to make sure its margins are good and that it has the potential to turn a profit in the future.
There is nothing wrong with investing in high revenue companies with fast growth, but you have to make sure their business model has the potential to turn a profit in the future.
Ideas are a dime a dozen
It doesn’t matter how good an idea may be, if the team behind it sucks, the business won’t go anywhere. Do yourself a favor and don’t invest in ideas… invest in people.
In an ideal scenario, a business should be a good idea, and it should be run by awesome entrepreneurs with a team who are fast at executing. If you can’t find an investment that fits these criteria, you should reconsider the investment.
Companies typically pivot from their original business models they thought would do well. They will have to adjust their strategy and come up with new ideas. But if the team isn’t good, you’ll lose your money because they won’t be able to pivot.
You make money on the buy, not the sell
It’s rare that someone is going to pay for something more than its market price is. For this reason, you should try to get the best possible deal when you first make the investment.
If you think there are no good deals, think again. There are always good deals, you just have to search for them.
For example, I was able to pick up a penthouse condo in Las Vegas in the highest rated building on the strip for only $250 a square foot. All of the other comps where showing that people were paying just over $600 a square foot.
I know, the deal may seem too good to be true, but the developers wanted to move the inventory, so they sold all of the penthouses to a group who could buy them all… I happened to know one of the individuals, so I was able to pick up one property.
I now have the option to sell that unit for $350 a square foot, and it hasn’t even been 30 days since I bought it.
If you hunt for good deals, you will find them. As an investor, you have to keep in mind that you are only as good as your last deal. So, make sure you choose them carefully.
Don’t spread yourself too thin
Both from a financial standpoint and a time standpoint, you shouldn’t spread yourself too thin. I currently have over 30 investments because I used to take a spray and pray approach with my investing.
The problem is that investments aren’t as passive as you think. The more time you spend on each of them, the more likely they’ll succeed. So if you have 100 investments, it’s very likely that you won’t have time to help most of them.
From a financial perspective, many of your investments will require more capital in the future… even if right now it doesn’t seem like they will. You should always keep a good portion of your cash in the bank in case you have to dump more money into some of your investments.
A good example of this is a realtor named Neil Schwartz, who owns dozens of rental properties in California. During the recession, most real estate owners got in trouble because tenants couldn’t afford to pay their rents and property values plummeted. Neil did well during this time because he was sitting on enough cash to continue to pay the mortgages on his properties when they were sitting vacant.
Don’t put all of your eggs in one basket
If you are just starting out and you don’t have a lot of cash, sure put all of your money into one business… because that’s what can help you become rich. But if you already have built up a nice nest egg, spread your money into multiple investments. This way if one goes wrong, you won’t lose all of your cash.
But you already know that.
What I really meant by “don’t put all of your eggs in one basket” is that you need to diversify your risk profile. Don’t only invest in risky investments or safe investments. Make sure you spread your money in different risk profiles.
I used to invest only in revolutionary ideas that are likely to produce big returns. Those ideas, however, are really risky, and most of those investments will fail. It doesn’t mean that you shouldn’t invest in big, bold ideas, but you should also invest in safe bets.
These days I have my money in real estate, Internet companies, the stock market and a handful of other sectors.
I hope you won’t make the same mistakes I’ve made because it lost me a bit too much cash. I eventually learned how to pick better investments, but my hope is you won’t have to waste a lot of time and money like I did.
In addition, if you want to get into the investing game, make sure you do it only if you are willing to continue to make bets over the next five to ten years. Investing isn’t a short-term game, and over time you’ll be able to increase your odds of succeeding.
What other mistakes should you avoid when investing?