The grass is always greener in the other guy's yard

05.19.09
By Randy Johnson

One of the things I have learned in my 45-year business career is that the other guy’s business always looks easier than yours. That's why some people get into businesses they know nothing about. Many fail, as statistics demonstrate. The truth is that all businesses require at least two things to succeed: work and wise decision-making.

During the almost 30 years I have been in the mortgage business, I have seen a lot of clients who make excuses over their losses from a foray into some extraneous business. In other cases, I have seen people take cash out of the equity in their homes to finance a business. Sadly, the track record for these investments is not always good.

In one such case, which I use for demonstration purposes, a friend for whom I wrote a 15-year loan had almost paid off his mortgage. He wanted to take over $200,000 to invest in some penny stock. He had “heard the story” and was a believer. He sincerely believed that he was going to make millions, which would finance a comfortable retirement. He did so, and lost everything – and had to start making those mortgage payments again from the beginning, with nothing to show for it.

Problem #1: Buying into the hype. Be careful here! Investments should rely upon facts and hard financial data. They should not rely upon “stories.” Those stories have been worked on and worked on by promoters until they get a story that enough people will believe. They tell the story to 100 people and if 5 of them believe and invest, they’ve made a fast buck (and usually, quite a few fast bucks). It makes no difference if the story is true or not; the only things that’s important is that the suckers – oops, I mean investors – believe it.

Problem #2: Not doing the math. If this is such a great deal, meaning if there is a LOT of money to be made, the guys who are running it WILL NOT let strangers in. They will keep it for themselves. If a normal return on a safe investment is, say, 5 percent, you can’t make 10 percent without taking risk. Let’s say the proposed return is 50 percent, a terrific return. But no one who is in charge of a company that good is going to let you in on their deal. So be on guard and do the math. If it doesn’t make sense, it may very well be a scam.

Problem #3: Taking unnecessary risks. I like to investigate what people tell themselves to pretend that the thing they want to do isn’t really risky. Whether it is junk bonds, trading options, buying penny stocks, investing in a grocery store so you can compete with Safeway – whatever it is, success does not always follow. Of course, that’s what the story is all about – to convince you that it really isn’t risky. But it is risky, as some people find out the hard way when they lose all of their money.

On the flip side, small businesses have been the biggest job creators in this economy. I am one of those guys standing on the sidelines and applauding at our free-enterprise system and the opportunities it affords individuals. Success comes from entrepreneurial individuals and this country is ripe with that innovative spirit. However, sometimes a good idea isn’t enough – oftentimes what can make or break a new business or technology is timing and good fortune.

In his book Outliers, Malcolm Gladwell makes the point rather forcefully that success in life is simply not a matter of intelligence and work ethic alone. There are a lot of other factors involved, notably luck, that play a far more important role in success than most people are willing to acknowledge.

If there is a message here, it is to be very careful before you embark on a business – either one you own or one you want to invest in – about which you do not have a good working knowledge. Otherwise, all you get is a tax write-off, and that isn’t worth much these days.

And if you aren’t in such a position to invest in a business, here is a risk-free investment that earns more than you can get even buying U.S. Treasury Bonds (which are currently yielding less than 3 percent): Send in extra money with your next mortgage payment. If you send in $100 on a mortgage that has a rate of 6 percent, it’s the same as buying an investment with a 6% return. The good news is that once you make that “investment,” it can never go bad. You cannot lose. And that is not a business you need to learn.

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Success comes from entrepreneurial individuals and this country is ripe with that innovative spirit.