High Net Worth Investors understand that real wealth is generated in the private markets rather than the public or common markets. The ultra-wealthy may gain a lot of their initial wealth from private businesses, often through direct business ownership or as an angel investor in private equity.
If you’re disappointed with your portfolio’s returns and are looking for other options, there are alternative investments. Alternative investments are generally defined as anything that falls outside traditional stock and bond investments and whose role is to potentially maintain a positive position when the broader markets decline. The goal is to mitigate portfolio volatility, hedge against downslides and boost portfolio returns in a way that is not tied directly to the stock market’s performance.
The stock market, as measured by the Standard & Poor’s 500 Index, gained a meager 1.2 percent in 2015 (including reinvested dividends). So far in 2016, the S&P is in positive territory by less than 1 percent. The bond market’s returns, meanwhile, have languished in the range of 1 percent to 2 percent for at least five years. When you think of investing the stock market or other somewhat passive investments, returns of 10 to 20 percent per year on invested capital are normally considered very good.
The mistake in applying this type of logic to Franchising, as an alternative investment, is that normally the investment is not passive. You make two types of investments in a franchise opportunity. In addition to your capital, you are also investing a fair amount of your time and management talent as well. You should be able to achieve a good rate of return on both investments.
The capital you invest is static, and the returns you will earn on your invested capital are normally reasonable by passive investment standards. The real opportunity for leverage in franchising relates to the investment you’re making in your time and talent. This is where a great franchise system can utilize this asset to increase your returns dramatically.
The franchisor develops a system or method of operation that employs the franchisee’s time in a manner that drives the income from the business to levels that are not available from an investment of capital alone. These are the systems where a good operator can create annual incomes greater than 100 percent of the total initial franchise investment within a short period of time.
Warren Buffett’s winning strategy is remarkably simple: Focus on companies that generate robust annual cash flow, and make sure those companies are not at risk of technological obsolescence.
Millionaires understand that some of the best ideas don’t come out of costly research but out of a passion for making the world a better place. Always listen to that little voice that says to “pursue your passion and success will follow”. Click Here to learn more.