People always talk about “the School of Hard Knocks.” If you haven’t enrolled in this school yet, you may be drafted whether you sign up or not.
In fact, it’s nearly certain that at some point, you will be.
I’ve learned a lot through hard knocks, pain, and loss. As I reflect back on my years as an entrepreneur, I realize that trials and failure are almost always better teachers than success.
It usually seems easier to avoid the mistakes of others than to replicate their success.
I heard a story about an inventor who made chit-chat in an airport lounge. His new friend (a fellow passenger) was really intrigued with his product idea, and he later sent him a check for a million dollars to build his new company.
Does this mean I should sit around in airport lounges—looking to chat with entrepreneurs? How do I replicate that success?
But when I heard the grueling story about a guy who ignored five signals that the real estate market was over-heated in 2007, which led to his financial demise, now that’s something I can learn from. And not repeat.
Anyway, after entrepreneuring (I just made that word up and I’m struggling with pride right now) for decades — and doing a podcast for the past 18 months — I thought I would summarize some of the key lessons I’ve learned.
Hopefully these lessons will encourage you in your journey, help you avoid a pitfall or two, and move you toward the success you’ve always dreamed of.
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Lesson 1 — Realistically Appraise Risk and Return
Higher risk does not lead to higher return. Higher risk leads to higher potential return. And higher potential losses. Perhaps even the loss of all your principal.
For years I failed to see the difference between investing and speculating. When your principal is safe and you have a chance to make a profit, that is investing. When your principal is at risk, and you have a chance to make a profit, that is speculating.
And to take this further, when your principal is at risk and you actually expect to lose money, that’s gambling. A form of entertainment.
At this point in my life, I’m done with speculation.
- When I sent $50,000 down a hole in the ground in North Dakota, hoping it would spew out ten to twenty times as much in the form of black gold, that was speculating.
- When my friends and I scraped together $250,000 to start a wireless internet company from scratch, that was speculating.
- When I overpaid for a five-acre waterfront parcel that could probably be subdivided into five premier lots and sold for double, that was borderline between investing and speculating. Leveraging it at 80 percent put it squarely in the speculation category.
Thankfully, at least the last of these three ventures paid off, and I made more on this real estate deal than I lost on the other two. As I’ve said before, ground-up developers are typically either the wealthiest or the poorest people in the real estate world.
I want to be clear that it is ok to invest, and it’s ok to speculate. As long as you are clear on the difference, and can accept the outcome.
The problem comes when you’ve convinced you’re investing, but you’re really speculating. Or even gambling. I’ve written about Warren Buffett elsewhere. This is one thing he’s really good at. We would be wise to follow his lead.
Lesson 2 — Don’t Fall in Love With A Property or Project
Instead, look for reasons to just say no (rather than yes). Some of the best investments are those you never make.
Donald Trump said this in an interview I read in grad school (circa 1987), years before I got into real estate. I’ve never forgotten it. But sadly, I’ve broken my own rule on a number of occasions, and it usually cost me dearly.
Around the turn of the century (I’ve been waiting to say that for years), I was smitten with Cape Cod–style homes. I was looking for my fourth flip, and when I happened across a classic Cape Cod, I was in love before I even walked inside.
I didn’t care that it was in a declining part of town. I reasoned that other buyers would likewise appreciate it’s beauty and pay me a premium once it was restored to its potential.
That beauty cost me months of headache and thousands of dollars.
Bad idea. See Lesson 1 above.
Fall in love with the numbers. Not the property.
Lesson 3 — Look For Flies Buzzing Around; Run Away If You See Any
I was meeting with a wealthy Texas oilman some years ago, and he explained his commitment to look for signs of bad character, or lies, in those he partnered with.
He put his weathered boots up on the desk and in his Texas drawl said, “When I’m looking at a deal, no matter how good it looks, I’m watching for flies buzzing around.”
Sensing my confusion, he went on: “If I see flies buzzing around above, I know there’s some BS down below. And I show that person to the door.”
This wise man had learned to follow his gut. And you need to do the same thing. Our brains can reportedly perform 38 quadrillion operations per second. One of the world’s most powerful supercomputers, Blue Gene, can only manage 0.002 percent of that.
This means that our brains can translate thousands of body language, tone, and other signals that our conscious brains cannot explain.
Do not ignore these warnings. Would you go to a mechanic and order him to shut off your red check-engine light without trying to find out what caused it?
Follow your gut.
In 1998, I had more cash than sense. My wife and I had sold our company and we were looking for places to park and grow our funds.
We had invested $100,000 with a brilliant guy in Charlotte who was making investors 3 percent monthly through a proprietary foreign exchange trading program.
A year later, I met with him to consider doubling my investment. Something seemed wrong. I couldn’t put my finger on it.
The good news was that I refrained from sending another $100,000. The bad news was that he still had my first $100,000 a few months later when the FBI caught up to him.
He still won’t tell the FBI where he hid $18 million of 2,000 investors’ funds. (I guess he hopes to enjoy it after his 153-year prison sentence. Hopefully the prison food is organic.)
Lesson 4 — Buy A Great Property in A Great Location at A Fair Price.
I’m co-authoring a series of articles on Warren Buffett’s advice for real estate investors. One of Buffett’s concepts is that it is better to buy a great company for a fair price, than to buy a fair company for a great price.
BP’s Scott Trench helped me translate this into language for real estate investors. He said something like, “It’s better to buy a wonderful property in a wonderful location at a fair price, than to buy a fair property in a mediocre location at a wonderful price.”
I play in the multifamily investing space. Because of the crazy overheated nature of this space right now, buyer-operators are regularly tempted to buy “great deals” in questionable locations.
My partner and I briefly looked at a run-down apartment in a tiny town with a small college that was planning for an influx of 300 new students. The dean told us they would all need a place to live.
It made sense, if the students actually came. But what if they didn’t? Or what if they moved somewhere else? Scratch that deal.
I believe about two-thirds of the success of a multifamily investment is based on the location and the hiring of a professional property manager.
So choose well, and vet carefully. No matter how great a deal or property, if it is in a city that has declining population, you probably won’t win.
And even if you can make a go at improving income, your eventual buyer will see it through the lens of the population decline and discount it. Maybe a lot.
Lesson 5 — Pursue True Wealth
Wealth = investments that produce income.
Though virtually everyone seeks it, I wonder how many have stopped to consider what wealth really is?
I propose this simple formula: wealth = assets that produce income.
Attaining assets that produce income means owning things that other people are willing to (actually, must) trade a portion of their labor and income to obtain.
The more income-producing assets you have, the wealthier you are. And the more assets you have that are insulated from downside risk, the better.
Attaining assets that produce income is another Buffett tenet. He said, “If you don’t find a way to make money while you sleep, you will work until you die.”
Most people all over the world trade their hours for dollars. Robert Kiyosaki talks about this extensively in Rich Dad Poor Dad.
After selling my company and moving to the Blue Ridge Mountains in 1998, I was considering where to invest my newfound small fortune. I was storing stuff in a self-storage unit, and I thought it would be great to build a similar facility. Metal boxes that spit out money.
So what did I do?
I built a large barn and a pond on my land. I stocked the pond and bought a tractor for the barn. I finished the basement in our new home and I planted hundreds of blueberry bushes. They died within months.
Twenty years later, here I am looking to invest in self-storage units again. I’ve reviewed the track record of some of the top players in the industry, and I have to say I’m blown away by their risk-adjusted returns.
And I daydream about what could have been if I’d known how to build true wealth two decades ago.
I hope my son has learned from these lessons. He’s a 24-year-old with a long-term view toward growing wealth right out of the ground. He’s buying timberland. He makes a nice profit cutting timber when purchased, then he sows seeds for future profits in decades to come. He’s buying assets that produce income.
Lesson 6 — Focus On One Thing And Do It Really Well
I was talking with one of my mentors the other day—a dear friend and brilliant business strategist. My friend has made and lost a few fortunes in his lifetime, and he was recently stung by a major gamble in hotel development that did not pay off.
He’s just ran for the ticket for Colorado Governor, and he’s been rubbing shoulders with bigwig billionaires for some time.
He told me that he and I had quite a few things in common with the billionaires. Similar brains. Similar business acumen. Similar training and degrees.
So what sets these billionaires apart from the other 99.9 percent of us? One simple word. One simple concept: focus.
These guys were able to obsessively focus on one thing. They went deep on it. They later went wide on it. They owned it and did it well.
When asked about the secret of their amazing success, Bill Gates and Warren Buffett both said one word: focus.
And to say yes to this one great thing, they had to say no to a thousand other good things—no, ten thousand.
Many of them stayed with their obsession for decades. And with a dose of great timing and providence, they created and dominated markets.
This one thing concept applies to the big picture and the tasks of everyday life. In a society with a business climate that tempts each one of us to multi-task like crazy, every study on the topic points to the importance of laser focus instead.
In their wonderful book, The One Thing, Gary Keller and Jay Papasan ask, “What is the one thing you can do right now that will make all other tasks easier or unnecessary?”
I am a serial entrepreneur. I have not obeyed my own counsel here for the majority of my career. This counsel actually came through years of toil and pain and mistakes.
It’s ironic that entrepreneurs love starting new businesses and jumping from task to task. We are pioneers and cowboys, and a lot of us are functionally ADD — whether we’ve ever been diagnosed or not.
No wonder the business startup failure rate is about 80 percent in the first few years — and the majority of survivors will fail after that.
But this doesn’t have to be your fate! You can learn from the failures and successes of those who’ve gone before you to enjoy success— and to leave a permanent on society mark for good.
- Realistically appraise risk and return
- Stop falling in love with properties and projects
- Look for flies buzzing around—and run away if you see any
- Buy a great property, in a great location, at a fair price
- Pursue true wealth
- Focus on one thing and do it really well
So how about you?
Tell our community (of over a million!) about the best lessons from your school of hard knocks. Share below!