Imagine walking into an Hermès store, handing over $100, and saying:
“I will not be involved in the day-to-day operations of your business, nor will I cover any expenses such as utility bills or employee salaries. Don’t bother me at all. However, one thing you must do is give me a share of all your profits from this day forward.”
Without another word, you leave and wait for Hermès to send you a cheque every quarter.
The best part? Hermès can’t say no.
With just $100, you’re essentially hiring some of the world’s top minds to run Hermès. You’re leveraging the hard work of its employees, who labor tirelessly to ensure the company generates profits. You’re also benefiting from the immense brand equity Hermès has built over centuries. When you see an Hermès shop, a tiny fraction of everything inside belongs to you. It’s real. It’s tangible. And because Hermès is a phenomenal business, the cheques you receive every quarter are likely to grow over time.
Now, let’s clarify some assumptions, as these don’t always hold true in the real world. First, we’re assuming the management team is well-incentivized to use your investment wisely.
But let’s twist the story a little:
You walk into a casino and find a gambler who has just lost his life savings. He’s reckless, overconfident, and full of empty boasts about how he’ll double your money in no time. Swayed by his charisma, you hand him $100 and say:
“I don’t care what you do with this money. Don’t bother me at all, but I expect a share of your profits from now on.”
He grins and heads straight back to the casino, only to lose every penny. Your $100 is gone forever.
As straightforward as this game of investing may seem, it carries real risks. Entrusting your hard-earned money to the wrong people can lead to disaster. The key is to find the right people to invest in—those who are competent, trustworthy, and properly incentivized to ensure your money is well spent.
But management is not the only factor in determining a successful investment. The business itself must be fundamentally sound. No matter how skilled a gambler may be, the casino always holds the upper hand in the long run.
Ensure that the entity you’re buying a stake in has positive tailwinds for the future. A good investment combines exceptional leadership with a business that’s poised to thrive.
Put in the work initially, and watch your cheques flow in.
Just keep a lookout to ensure the story doesn’t change.