Buy Low, Sell High

Don't be forced to walk away without a return on the long-term investment in your business.

By: Chia-Li Chien | Published 05/05/2010

 

This is the first of three excerpts from Show Me the Money by Chia-Li Chien.

 

When I was in kindergarten, I often saw my paternal grandfather listening intently to the stock market report on the radio. Remember, this was the 1960s, when you either got the latest stock news from your radio or waited until the next morning's newspaper. Well, he listened and charted out daily trends to determine his next stock trade. He and my dad got into many deep discussions about their hunches. I suppose my father's love of trading in the stock market really started because of my grandfather's influence.

My dad, a math major and high school math teacher, later retired as an assistant high school principal. With his background, he obviously knew the odds of beating the market and had carefully calculated his every move since his early 20s. "Buy low and sell high" was always his motto. I could not agree more with my dad. This Golden Rule of Investment 101 has been around for many years.

If you asked my dad about a stock in which you knew you couldn't get back your initial investment principal, regardless of how much the interest or dividend income was, he would probably tell you not to waste your time on that particular stock, because no one should be in the market only to lose hard-earned principal

Unfortunately, this same Golden Rule of Investment 101 does not translate well into the entrepreneurial world. Most business owners invest their entire life's work in their business. This includes emotional attachment and personal capital in addition to their many years of hard work and sweat. But when they want to retire or move on, one-third of all business owners are simply forced to walk away and close down, according to the Small Business Administration. My father would tell you this was a very bad investment.

In addition to this buy-low-and-sell-high Golden Rule, there is an unwritten rule, according to my dad--know when to get out. In stock market investing, this is referred to as timing, or a having in mind a preset sell price. Your objective is to reach a certain, predetermined rate of return before you enter the market.

For example, when DreamWorks went public in the early 2000s, I bought it for around $20 per share. (This is for illustration purposes only and was not the actual price at the time.) I knew that with a small company like DreamWorks and with its many movie distributions, it would probably take about two years to reach my pre-defined goal of 15 percent per year or about $27 per share. However, one year into the investment, the price was down to $15 a share, so I had to make a decision to either sell at that price or stick with the plan. I stuck with my plan, and by the end of two years, I got about $22 per share. Not good, but at least not a loss.

Missing the opportunity to sell high


Vivian, a Columbia University MBA graduate, was a successful owner of a Chinese restaurant chain. She married into the restaurant business with her husband Jerry's family, becoming a part of their long-standing reputation and even fame in Flushing, N.Y., and in Manhattan's Chinatown in the 1970s. Over a 30-year period, Vivian launched many more successful restaurants and was also smart enough to acquire the real estate in which her businesses operated.

So first of all, Vivian got into the Chinese restaurant business at the right time. In the 1970s and '80s, there were hardly any competitors. Practically anyone who opened up a Chinese restaurant could not only survive, but also thrive.

Second, Vivian was in the right place--she started out in a niche market, serving only the Chinese in Chinatown neighborhoods in Manhattan and Flushing. She gradually expanded her business to Long Island, serving Chinese food in a wealthy, mostly Jewish neighborhood.

Next, she assembled the right people for her team. Her headquarters was in Chinatown, and she employed only the best-of-the-best talent in all her locations.

Vivian had the success formula--the right time, the right place and the right people, and, as a result, created a very good "lifestyle" business. When John, her only son, graduated from MIT as an engineer, with plans to intern in China, Vivian felt like she needed to move on with her own life.

She began to sell off her restaurants one by one, along with the underlying real estate. Due to stiff competition and a saturation of Chinese buffet restaurants, no one expressed interest in buying her restaurants. When Vivian was ready to sell, just about anyone could open up a new restaurant on the next corner. There was no demand for upscale Chinese restaurants anymore because of higher operating costs and the inability to compete with the Chinese buffet down the street. Vivian was forced to simply close most of her restaurants, making the real estate her most valuable asset.

This was very hard for Vivian. Her restaurant business had no value when she was ready to take a break and travel the world. According to the Small Business Administration, one-third of all privately held businesses simply close. One-third transfer within to other partners, family members or children. One-third sell to a third party.

Thinking of the Golden Rule of Investment 101, does this make sense to you? It doesn't to me. Vivian, like many business owners, not only invested her capital but also most of her adult life in the business. And then at the end, she was basically forced to walk away without a return on her investment. Like many business owners, Vivian simply did not build on the value of her business in order to replicate or replace her business income when the day arrived that she wanted to do something else with her life.

You could argue that most business owners take a salary from their business, so there is really no loss at the end. And in addition to a salary, you reap the benefits of being your own boss, enjoying the flexibility and freedom of being self-employed. But let's be honest, most of us, as business owners, also dedicate much of our energy, our time--our entire lives--to the business. Unless we can trade what we put into the business for a reward at the end, it is not really a fair trade. It is not a smart way to invest.

So now is the time to ask yourself: Are you buying high (investing in your business) and selling low (walking away with nothing)?

 

Chia-Li Chien, CFP®, CRPC, PMP; helps women entrepreneurs to convert their business into meaningful personal wealth.  She is the author of Show Me The Money and columnist for WomenEntrepreneur.com & Fox Business online.   She is available for consulting, speaking engagements and workshops.  She can be reached at www.chialichien.com or jolly@chialichien.com.

 

Women Entrepreneur Magazine URL:

http://www.womenentrepreneur.com/2010/05/buy-low-sell-high.html

Fox Business online URL:

http://www.foxbusiness.com/personal-finance/2010/05/24/prepare-cash-later/

 

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