In our most recent series written by Jamie Cornehlsen, Denver CFA and founder of Capstone, FLOW examines how we seek out investments and make selections based on current market trends and future forecasts. Part one of our series focuses on the pros and cons of commercial investments.
With the recent decline in the stock market, I’ve began to wonder what it really means to invest. This question takes me back a couple of years ago to when I attended the Berkshire Hathaway Annual Meeting. The meeting in itself was a spectacle for investors, as Warren Buffett and Charlie Munger drew in over 19,000 attendees to Omaha, Nebraska.
What really struck me was that both Buffett and Munger urged the attendees to think of each and every investment as though they were going to purchase the entire company for themselves.
I knew it was important, so I logged it away in my “Mind Palace”, what Sherlock Holmes calls his memory vault.
After so many years of high valuations and low interest rates in the stock market, I found myself growing antsy, in search of my own reasonable investment. Without one to be had, I even thought about buying a liquor store.
A good friend had purchased one and I was slowly recognizing the benefits of owning such an establishment. I was following the financials closely and had become aware of the store’s ability to generate cash flow. In addition, I realized people tend to purchase more alcohol during slow economic times, therefore offsetting investments that decreased in value during economic slowdowns.
Assuming a Sizable Workload for a 10% Return
Owning a liquor store would produce about a 10% return on my capital, meaning that for the money I put down, I could expect (as the owner) to generate a 10% return each year. Some years would fare better than others, while some years I would not make my 10% return.
My wife and I met with the business broker. We toured the store covertly as customers and visited nearby liquor stores as well.
Owning the liquor store was possible and I was hopeful for the generated 10% returns; however, as the owner I would still have to run the store. This meant buying the liquor at reasonable prices, interviewing and hiring staff, maintaining a weekly shift schedule and enduring the drama that employees can often create.
In the end, we decided not to invest in the liquor store. The 10% returns were attractive, but the additional work necessary to run the business made the potential return a less desirable deal than I was willing to take on.
Stay tuned for the next FLOW post, where I discuss the second investment I contemplated making in the market.