At the end of this post there will be a technique for getting a MASSIVE ROI on your investment. Truth be told, this can be pushed a little further and get an infinite ROI. Much like having to eat your vegetables before desert, you’re not allowed to skip to the end of the post (and if you do, in fact, do so, I guarantee it will make baby Jesus cry – baby Mohammed and baby Moses will be rather annoyed too, but they aren’t the crybabies Jesus is).
I’ve written before about how important I think measurement is. To just go by your gut in the investment world is INSANE (I guess this would be called gambling). The pendulum can swing too far in the other direction where people start believing that metrics provide more information than they really do. One example of this is the much maligned Value at Risk (VAR) which has been said to have lead to the subprime meltdown. I don’t feel that VAR as a measurement is inherently bad, or that CDOs are evil (to me that’s like saying a rock is evil, what does that even mean?). I just think both were misused in ways that lead to very large problems.
Many rookie real estate investors are attracted to the idea of “no money down”. They’re focusing on one particular part of the deal (the downpayment) and judging the ENTIRE deal by it (lower is better). The deal must be judged as a whole, not just by one factor (it is VERY easy to lose LOTS of money on a no money down deal, in fact it can be easy to argue that they’re pretty hard to make money on). In the linked-to article, John T. Reed argues that profit is a better number to focus on than the down payment.
Even focusing on profit has many pitfalls. Say I offer you a deal that’ll give you a 100% profit in 1 week. Sounds good? The only catch is there’s a 99% chance the deal won’t be completed and you’ll lose your entire investment along with the profit. Still interested? Say you want a high EXPECTED profit. Fair enough, I’ll offer you an expected profit of 25%: I’ll give you a 25% chance of earning 4 times your life savings, and a 75% chance of losing everything (you’ll have a networth of zero). Interested? If you’re reckless and ARE interested in this deal, how about if we set the pay off date as 75 years in the future?
With dividend stocks, it’s often enticing to look at the yield and get greedy imagining the higher pay-offs with larger yields. Of course, the stocks usually have a high yield for a reason – the market doesn’t feel the dividend is secure. With companies like Bank of America, the yield was sky high, right before it was cut. With companies like Washington Mutual it kept going up and up: until it was cut to $0.01 right before they went bankrupt.
There’s a line from “get rich quick” circles where you say to a seller “You name the price, I’ll name the terms”. This will get stupid people interested in doing a deal with you so they can get “top dollar” for their property. The sad truth is, ANY purchase price can quickly be made into a bad deal with certain terms (and offers must be evaluated based on the price AND the terms).
So finally, thanks for your patience and for not making baby Jesus cry, here’s the punch line. In order to get a 49,250% ROI on an investment, find a fast food restaurant that charges it’s employees for their uniform. Buy two uniforms for $40, then work there for 40 hours a week for minimum wage ($9.50 in Ontario) for 1 year. After earning the $19,760 you’ll have an ROI of 49,250% (19700/40). Feel free to buy two more uniforms in your second year working there and do it again! To get an infinite ROI, just work at a place that doesn’t charge you for the uniform. Wow!!!