One of the most pleasing outcomes of being a long-term investor is that history has demonstrated that the rewards of owning an excellent business in a tax-efficient manner can be life-changing. This sentiment was summed up by legendary investors Warren Buffett and Charlie Munger at the 1996 Berkshire Hathaway meeting when they commented, “If you find three wonderful businesses in your life, you’ll get very rich.” One year later, in 1997, Warren remarked, “The single biggest recurring mistake I’ve made has been my reluctance to pay up for outstanding businesses.”

Read More

(1) High average returns

Angel investors have returned 2.5 times their original investment over a period of about four years.

(2) Potential for super returns

Peter Thiel, cofounder of Paypal, turned his $500K investment in Facebook into $1.6bn. Jeff Bezos turned $250k into $1.6bn on Google.

(3) Affect life changing solutions

Startups can change the world for many people. Think of the connections Facebook has fostered.

(4) Job creation

Supporting the next big thing has impacts far beyond financial returns and innovation, but into the wider employment side of the economy.

(5) Get involved

You will have the opportunity to influence and impact the future direction and prosperity of the startup.

(6) Tax incentives

Many countries offer juicy investor tax incentives for supporting startups.

Here are the things to look for:

Fills a Need

Make sure that the business actually does something that someone will always want. For example, a business dedicated to bringing you the best housing, or a business that supplies people with books, is a solid foundation. A business that tells you to send them a dollar and pass the letter on is not. Any sort of business which doesn’t fill an actual need like multi level marketing (MLM) schemes are bound to fail. The more the need being filled matters, the more solid your business foundation. For example, people are fine without MLM books; people aren’t fine without food.

Is Run Well

Does the CEO sound like he sits on his ass all day and drinks beer? Is management in it to make a quick buck for themselves, at YOUR expense? Find out about the people running the business. Make sure that they actually care about filling the need in part 1. Just remember, if the business isn’t filling the need, it’ll disappear.

Has a High Barrier of Entry

The business should be hard to replicate. If it ends up making a lot of money and it’s easy to duplicate, pretty soon, there will be thousands of businesses just like it! People aren’t dumb – if they’re making their 8% in bonds and they see you’re making 200% with your business, they’re gonna come. This is where the branding of the company, and quality of the product becomes of paramount importance (see how much money is integrity worth?). If people trust the company, and the product is working just fine for them, it’ll be awfully hard to get them to switch. This is an interesting situation which I like to call the gap concept.

Is Underpriced

Let’s face it. We want to make money, so we’re looking for something cheap. Now, that doesn’t mean we’re ripping the other people off. It’s cheap for a reason. For example, if it’s a private business, the owner may need money to expand, or if it’s public, people may perceive the company to be very risky or unsuccessful for whatever reason. In that case, by putting your money in, you’re actually giving it your vote of confidence and making it slightly more expensive. Of course, the more promising you think the business is, the more you can pay for it. Just keep in mind though that there’s potential everywhere while good results are hard to come by.

While there are probably other things to look out for, these 4 are by far the most important. If you just follow these 4 tips, you should be well on your way to finding a good, safe business to invest in!

Looking for Deals?