Today’s topic is You Don’t Invest In Assets.  It’s a bit of a trick title, but the primary asset in which you invest is probably not what you think.

As investors, we very much focus on the asset.  In which asset should we invest?  Stocks, bonds, real estate, commodities, etc?  The truth is, those are the secondary assets.  In most cases, the primary asset is the management team.

For example, let’s say there are two identical airlines; and both have the same type and number of airplanes – 100 787-9 aircraft.  One airline is wildly successful, and the other just declared bankruptcy.  If you bought stock in one of these, you probably thought you invested in a company whose primary assets were airplanes.  The primary asset you really invested in was the management team of the airline.  One team was successfully able to lead and manage thousands of people and processes to enable the efficient and profitable use of those 100 airplanes.  The other management team failed.

Let’s look at another example, two identical apartment buildings.  One is located on the west side of Main Street, and one just across the street on the east side of Main Street.  The west-side apartment building has 95% occupancy and is very profitable.  The east-side apartment has 75% occupancy and is barely able to cover its operating expenses.  What’s the difference?  The management team of the west-side apartments knew what they were doing, and the east-side team did not.

The secondary asset class in which I invest is mostly apartment buildings.  More importantly, I currently only invest in apartment buildings managed by two management teams (the primary asset).  A couple of times a month, these teams update me and the other partners on how the apartments are performing during the COVID-19 Pandemic.  What they show is the average rent collected across apartment buildings in the United States compared to the average rent collected by the apartment buildings in which I invest.  My management team is collecting 3% – 5% more rent than the national average.  I love it when theoretical teachings play out in real life!

In both of the previous examples, it wasn’t the airplanes or the apartment buildings that determined whether the investment was successful, it was the people – the management team.

If you’ve seen any of my previous blogs or videos, you might have picked up that I’m not a fan of publicly traded stocks (See Blog #5 – What’s Wrong with the Stock Market Anyway).  There are numerous reasons for this, but one is that I will never know or meet the management team.  With my private investments, I know and have access to members of the management team.  In some cases, we’ve become great friends.

An attorney I know has a very specific test he uses when evaluating an investment and meeting the management team for the first time.  He takes them to breakfast or lunch and observes how they treat the wait staff.  How a person treats another from whom there is nothing to gain and will likely never be an investor, says a great deal about his character.

So the next time you make an investment, keep in mind the primary asset – the management team.  Find out what you can about the character, capabilities, and track record of the management team who will be managing the secondary asset. 

And remember, when you make better financial decisions, someday you can make work a choice instead of a necessity.  If you have a question or comment for me, you can leave it below,  reach me via the contact page, or any of The Prolific Investor’s social media channels.