Get Control

Investing can be a risky proposition.

There are a zillion things that could negatively impact your investment and wipe out its full value. Regulations can change. New competitors can enter the market. More innovative products can be launched by other companies. Key employees can leave for higher pay. An uninsured risk can strike, bankrupting the company.

There are two ways to deal with this unpleasant reality.

One, you can make individual investments only a small portion of your net worth. That way, if one of your investments gets hit by one or more of the aforementioned risks, it doesn’t completely wipe you out from a financial perspective. Or two, you can demand control. And by that, I mean ownership control.

Both approaches can be effective. I recommend option one for most people. It doesn’t require a keen business sense; it offers a more stable investment experience; and helps most people sleep better at night. That being said, the investment returns of option two can oftentimes look mouthwateringly attractive.

What you should avoid is mixing the two approaches. Investing an outsized portion of your net worth into a single investment that doesn’t offer you control can be a killer.

Control can come in a variety of forms. It could be joining the management team so you have direct influence on the operations of the company. It could be holding a majority – or a large minority – of the company’s voting shares. It could be joining the board of directors so you have a say on leadership and strategic direction.

But unless you have significant control over an investment – whether that’s a company, a farm, or a rental property – going all-in is wildly risky. Not only can bad things happen, but if you don’t exert control there’s nothing you can do to change the course.

For instance, let’s say you are presented with an attractive business opportunity. You can buy into a company that has been growing rapidly over the last 10 years but now needs some additional capital to keep the growth going. The company is only accepting new investors who bring $1 million to the table. Let’s say your entire net worth is $1.4 million. If everything goes according to plan, your investment could triple in the next 10 years.

Here’s the problem: Your $1 million investment represents less than a 5% ownership stake in the company, so voting control is out of the question. You don’t have a background in the company’s industry, so joining the management team makes no sense. And the current board of directors is complete, so getting a seat at the decision table is not an option.

You had better have supreme confidence in the company, its strategic direction, the management team, and the board of directors if you plan to make that investment.

Because while the company has been doing well for the past 10 years, that offers no useful insight into what may transpire over the next 10 years. What if the management team isn’t vigilant about new opportunities? What if the board is checked out and simply resting on its laurels? What if the company’s product or service is about to be leapfrogged by a competitor? What if a regulator intends to impose costly and burdensome rules? What if the company’s rock star CEO dies of a heart attack?

Your investment could quickly lose value. And your only option would be to sit on the sidelines, with a clear view, and watch it all happen.

The richest people in America have tended to go all-in on one business. That concentration made them fabulously wealthy – think of Elon Musk, Andrew Carnegie, Jeff Bezos, Henry Ford, Bill Gates, Warren Buffett, and John Rockefeller. But in each of those situations, they had significant control over the companies they guided and grew. And I’m sure they were awarded generous side-servings of stress and sleepless nights, too.

Control is not for everyone.

But if you insist on going all-in on an investment, you would be foolish to go without it.