The Stock Market... Buy and Hold, or Cash Out and Find Something Else to Invest in?

HERE’S WHAT’S GOING ON NOW:

A recent article from USA Today (3-9-09) discusses the situation that many Americans find themselves in currently….many have had their investment dollars invested in stocks, mutual funds, bonds, bond funds, 401K’s & IRA’s (which in turn are commonly invested in stocks and mutual funds), and most of those Americans have seen their investments plunge in value by over 50% in the last year. And, there’s no way of knowing, today, whether or not the stock market and other investments will recover soon, or continue to slide even further.

 

THE STOCK MARKET’S AVERAGE PERFORMANCE:

Since 1930, up to the end of 2007, the stock market delivered an annual “return on investment” of about 10%, averaging out the good times and the bad times. Bonds, CD’s and other investments averaged less than 10% annually, and common are returns of less than 5% pre-income taxes. And, there’s no way of knowing when/and/if a return of 5% to 10% annually in investments in the stock market or other investments will be the norm in the future.

 

WHAT TO DO NEXT?

Those who’ve seen their investments drop in value so dramatically since 2007 are now wondering, what should I do?

 

Should I “hold on” to my investments and wait for the stock market to recover, and carry me with the recovery back to the point where I was before the current crisis? The USA article makes the point that, for an investor to recover from the losses of the last year or so, even if the stock market started recovering today, and if it matched the traditional 10% annual returns of the last 70 years, it would take until 2017 (8 years) for that investor to “get back to even”, using the S&P 500 stocks as a benchmark. And, that’s if the investor is invested in S&P 500 stocks, not if the investor is invested in the “wrong” stocks. If the stocks only average a 5% annual return, it could take until 2025 for the investor to get back to where he started in 2007…that’s 18 years to get back to the original value.

 

Or, should I “cash out” and look for somewhere else to invest the money I have left to invest? After all, it’s possible that, if I “hold on”, and if the stock market continues to slide before it recovers, I could end up with even less investment dollars to re-allocate. Of course, cashing out of stocks/mutual funds and transferring my investment dollars to low yield CD’s or Money Markets or Savings Accounts, though safe from “losing it all”, will likely not even keep up with the rate of inflation. That’s a sure way to lose value over time. The USA article advises that “investors’ time would be better spent revisiting their financial plan”…meaning…investors should look for other ways to invest, and other things to invest in.

 

WHAT’S ANOTHER WAY TO INVEST?

We know, from having worked with small business investors for over 27 years, that the typical “return on investment” for investors who buy and operate profitable small businesses has been consistently, for millions of entrepreneurs, through good times and bad, a “better deal” than any other investment plan we’ve seen or ever heard of. We’ve seen, for folks who buy “good businesses, with good records, and good cash flow”, that these investments have produced annual ROI’s (return on investment) of 20% to 100% or more.

 

WHAT ABOUT RISK?

These investments/acquistions have not only produced annual ROI’s of 20% to 100% or more, but also have proven to be low risk investments, that usually survive (even in tough economic times) and thrive and prosper (especially in a recovering economy). We’re not talking about acquiring a troubled business, but instead are talking about owning a business that consistently produces enough revenues to not only pay it’s own operating expenses, and enough cash flow to pay the interest and principal on it’s debt, and generates a salary for the owner, but also produces “excess cash flow” that rewards the investor more than they typically could possible realize from investments in stocks, bonds, CD’s or anything else. And, these excellent returns are typical for profitable businesses of all kinds, not just “exceptional” ones. Yes, a low risk, high return on investment is possible, whether you own a Laundromat or a Manufacturing Company, a Fast Food Restaurant or a Distributorship, a Trucking Company or a Carpet Cleaning business, whether you own one absentee or are a full time owner-operator.

 

AND, IT PAYS A “BONUS” RETURN ON INVESTMENT:

For an investor who owns a business that is consistently profitable (whether the business is small, medium or large), there’s something “extra” that commonly provides a “bonus” over the cash flow benefits….it’s called “equity buildup”. Just like in investment real estate, an investment in a profitable business creates ownership equity that is usually returned to the owner when they eventually sell the business (a benefit few traditional jobs deliver to you, since a job, when you leave it, rarely gives you a cash equity bonus).

 

AND, LOOK AT THIS “EXTRA BENEFIT”:

Commonly, the business you own also appreciates in value over the years, meaning it sells eventually for more than the owner had invested in it. So, the owner of a profitable business can realize (a) a salary from the business during the years the owner owns it, and (b) extra annual cash flow in the form of distributable profits, and (c) the business commonly “buys itself” out of it’s cash flow, meaning the business generates enough revenues that it can pay off any debt used to acquire it in the first place, therefore the owner rarely has more than a down payment invested in the business, and (c) the owner builds up equity, so that, if he/she sells it after the business has paid off it’s debts, the owner gets the proceeds of the sale as an additional “return on original investment”, and (d) the business commonly appreciates (grows) in value, producing an additional “windfall’ profit for the owner.

 

ANOTHER BONUS…YOU’RE IN CHARGE

Most investors in stocks, bonds, etc. rely on a financial advisor or a stock broker or fund manager for guidance on what to invest in, and, when the advisors guess wrong, you suffer the loss. Most investors in the stock market feel “helpless”, or not in control of their investments. Most jobs likewise leave you at the mercy of someone else every day. But, for the entrepreneurs who own their own business, you are “the boss”. You’re in charge of what happens to your career, your investment, your money and your future. You’re pro-active, not just reacting to someone else’s decisions. You decide every day what to do and how to do it. Even absentee owned businesses are owned by people who have complete control over their investment, by the leadership you provide to the managers of your absentee owned business. This bonus is called freedom and independence and self reliance and control.

 

A RECENT CASE STUDY:

We’ve been working with a prospective business buyer for over a year. The buyer looked at and picked out a business to buy in late 2007, but didn’t complete the deal, as he was reluctant at that time to cash out his IRA/401K’s for the down payment needed to buy the business. Instead, he didn’t buy a business, kept the same job, and kept his discretionary investment dollars in the stock market. This particular business had been in business over 10 years, was consistently profitable, and went on to have one of it’s most successful years in 2008 under the old ownership. In the intervening year, the reluctant buyer had lost over $100,000 in the stock market downturn. And, the business he didn’t buy in 2007 “threw off” over $90,000 in extra cash flow in 2008, after paying it’s operating expenses. So, this cautious buyer was, by his inaction, worse off by a total of $190,000 that his hesitancy cost him and his family by not buying the business in 2007. He currently is wrestling with whether or not to “cash out” his remaining investments in stocks, bonds, mutual funds, and buy this, or some other, profitable business with those disappearing dollars that he has left, or to leave his money invested in instruments that have lost over 50% in the last year, and that could not “catch up” to their 2007 values, even if they miraculously return 10% per year, for at least 8 more years (according to the USA Today article).

Interestingly, if the buyer would buy the business, and pay a manager, say, $50,000 of the $90,000 cash flow annually it has in excess profits, leaving the buyer $40,000 per year “cash on cash return on investment”, that would earn the buyer about $320,000 “extra” over the next 8 years, owning the business “absentee”. And, since the buyer can buy this particular business for about $150,000 “out of pocket” (down payment and reserve operating cash needed), the cash flow ROI ($320,000) alone would be about 213% over the 8 years, or about 27% per year, not counting the equity build up of about $50,000 per year, an additional annual 33 1/3% ROI on the original $150,000 investment by the buyer (and, by “letting it ride” and not selling the business, future profits could also return to the buyer his/her original $150,000 investment and a very attractive return on investment), and… not counting an additional reward (ROI) if the buyer is able to help the business grow in value in the future (appreciation of the value of the business). Of course, if the buyer didn’t hire a manager, and managed the business as an owner-operator, he would have the $50,000 more annually “in his pocket” that he wouldn’t be paying a manager, returning 100% of his original $150,000 investment in just 3 years. So, one question to ask is, if he leaves that $150,000 in the presently depressed stock market, is it likely to produce comparable financial benefits to the buyer?

 

HOW ABOUT DIVERSIFICATION?

We’ve never encouraged any investor to be only invested in owning a business. Like all prudent folks who investigate how to invest, we’ve always believed that investors should have a “spread” of investments, with some of their money in the stock market, some in cash (or CD’s or Money Markets), perhaps some invested in real estate, and/or other investment diversifications. And, even more, the investor should further diversify by making sure  that the portions of the investments devoted to the stock market segment should themselves be diversified and invested in a variety of kinds of equity choices (some in large caps, some in small caps, some in foreign funds, some in Exchange Traded Funds, etc). But, all that considered, we’ve also always believed that there surely should be a place in our investment lives for “returns on investment” of more than 10%, with at least a portion of our available investment dollars. And, when we discover a low risk investment that could reliably, consistently deliver to us an annual “return on investment” of 20% to 100% (or more), shouldn’t we “make room” in our financial planning for that investment?

 

HOW TO FIND THESE GREAT INVESTMENTS:

FNBC has specialized in finding solid, low risk, profitable businesses for investors to buy, for over 27 years, and we’ve brokered the sale of over 4,000 businesses for our business owner clients and business buyer customers. We find such investments for individual, “main street” buyers who have relatively small down payments, and for high net worth individuals who may have “deep pockets”, and for companies expanding by acquisition, and for Private Equity Groups and partnerships. We find these opportunities throughout the USA, in towns large and small. We specialize in brokering business of all kinds, all sizes, all types. And, we help buyers arrange the financing needed to make the acquisition, as well as coordinating all the details with the buyer’s and seller’s lawyers, accountants and other professionals.

FNBC is well known for  “Business Buying, Selling and Financing Made Easy”.

 

FOR INFORMATION ON HOW YOU CAN REALIZE A MORE  ATTRACTIVE RETURN ON YOUR INVESTMENTS, WITH PROVABLY LOW RISK, CONTACT FNBC TODAY

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