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Great entrepreneurs quickly learn the expected return on investment
of their efforts and will invest heavily where they perceive it is the highest. In fact the difference between a business owner and an employee is the one who understands every dollar and bead of sweat is an investment. And if you believe it these are investments then you naturally know your expected return.
You must also understand that not every ROI is linear. Sometimes investments are made in activities, people or things that have an indirect relationship with the expected return.
Way back in 2006 we interviewed 90 high net worth investors, mostly owners and entrepreneurs, to write a white paper which identified their investment experience in three areas: Their own business, real estate and securities (stocks and bonds).
What we found was that when it came to securities, these people often deferred to other professionals and followed the too many eggs in one basket mantra and ultimately had very average to sub-average ROI.
We uncovered that the reason for this was mostly due to the number of disinterested parties, layers of costs and taxes.
Next looking at real estate, most of these wealthy individuals cited strong ROIs. In fact the best were found with personal real estate investments and decisions they made on their own. Lastly, we found the greatest ROI was found in these entrepreneurs’ businesses. In fact, their returns always far exceeded any possible real estate (depending on timing and leverage) or securities investments.
So what was the biggest reason for the differences? Well, it was clear that personal involvement in the investment decision played a role, so did taxes and fees, but the best ROI came from patience and a lack of concern about short-term volatility – this equates to control and perceived risk. Wealthy owners were very willing to invest in their own project with a long term outlook and not sweat short-term fluctuations in value because they viewed investing in intangibles like people, processes, systems and market share was important. A lot of these items do not have a direct correlation with sales that created revenue for their ROI, but they definitely are indirectly correlated.
Investing in advisors to guide them, adding support people (employee) to give them freedom, processes to give them leverage and systems to give them scale all were deemed critical.
What are you investing in today to help generate the best ROI for your business?
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