There is one question that can dramatically improve your investing decisions - Why are they selling?
That question is one of the most powerful questions that I use when making my own investing decisions or when advising others.
This week I’ve had no less than three opportunities to apply that question.
The first instance was while I was coaching an entrepreneur considering buying an existing business. It was clear that he was emotionally attached to the business. More than once, I asked a tough question, and he recognized that his answer(s) didn’t make sense, yet he was still barreling forward to close the deal. At one point, he described how the current business owner “had it made.” He said that the current owner worked very few hours on the business and was making a lot of money. So, I asked why the owner was selling if things were so great. The answer was that the owner wanted to retire. I pointed out that it sounded like he was already retired because he worked so little in the daily operations of the business.
The second time was with another client looking to purchase a business who needed help attracting investors. That business appeared to be netting about $250k/year in profit. However, the valuation of the business varied between $800k-$4M, depending on the source of the valuation.
Wondering why someone is selling a business isn’t the only place where this question can come in handy. It can also help you when investing in stocks or real estate.
Think about it this way. Basic economics requires both a buyer and a seller in a transaction. If you are looking to buy a particular stock or cryptocurrency, or maybe a business, someone else is willing to sell that asset. What do they know that is causing them to want to sell the asset?
My third opportunity this week was while I was looking to make some stock trades in my personal portfolio.
With stocks, when a person is selling, it often means that they believe the stock has reached its highest valuation or it is likely to start falling in value. When a person sells a business, they hope to cash out its value. Sometimes it is because the owner is retiring and doesn’t want to operate the business anymore. However, I have witnessed plenty of businesses go up for sale because the owner is tired of not being able to grow the business, or they have been taking a loss.
Framing your own asset purchases in this light can help you avoid making poor investing decisions. It will force you to slow down and think about the transaction differently.
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