Do You Have Control over the Return for your Investment?
Which of the characteristics which will generate the return on your investment do you control? Is the investment active or passive? What happens is the investment spins out of control? Do you have any ability to right the ship? Or could the investment destroy the capital you’ve invested while you sit helplessly by watching it go down? These are the questions at the heart of the issue of control. We’re continuing in a series of what to look for in a potential investment.
Let’s look at the two major types on investment with regards to control…
Passive investments. With this type, you probably have little to no control over the management, performance, or final outcome of the investment. You need to understand this from the outset. There can be advantages and disadvantages to this. If it’s your goal to allocate money into the hands of a capable manager, then you are willingly giving up management in order to achieve the benefits of his expertise. This is almost always the case with any public security (unless you are a very large investor). If you are investing in this way, you need to be one of two things. Either…
1) Incredibly certain of the person managing your investment for you and the enterprise in which you are investing in OR
2) You need to have a stop loss which you can use to cut your losses at a predetermined point
Active Investments. If you are considering an active investment, then you will have much more control. This might be a partnership amongst many people where your own involvement is very limited, or it might be your own sole proprietorship in which case all management authority and responsibility is on your shoulders.
For the sake of authority, there is no substitute for having heavy involvement. If something goes wrong, you will have an active knowledge of exactly what that thing is and be able to apply your own Human Life Value to the problem to bring a successful resolution.
You are much more able to direct the circumstances surrounding the success or failure of your venture if you are able to manage and influence the operations of the investment.
Why is it advantageous to have control over an investment’s characteristics?
This is Part 21 in the series Investment Due Diligence. To use this as a growth tool to better understand your own calling, you might start by reading the first few posts in the series… Part 1, Pt 2, Pt 3, Pt 4, Pt 5, Pt 6, Pt 7, Pt 8, Pt 9, Pt 10.