Direct Investing

Direct investing is an investment strategy that includes such activities as angel investing in startups, directly owning real estate, investing in actual businesses that people start, buy, grow and manage and similar activities. If it sounds like there’s some room for interpretation, there is. Since definitions in the investment world are not nearly as specific as in science, engineering, medicine, etc. (though some agenda-driven individuals may claim they are), it may be easier to understand the definition of direct investing by stating what it is not.

Direct investing is not owning anything through a third party. Examples would be investing in a fund, even if the fund puts its capital into a tangible business. Anything that has been turned into a security or has a third-party manager who has discretion over the investment is also not a direct investment.

As a rule of thumb, it’s a direct investment if there’s no one between your money and the business it is funding, except the operational management of the business. Or, to put it in more personal terms that may hit home, you know it’s a direct investment if someone from the business calls you in the middle of the night when something goes wrong and asks you what to do.

This distinction is important because the characteristics and behavior of direct investments different from others in important ways. For example, many people confuse direct investing with entrepreneurship. They are most definitely different.

Direct investing is done with a specific investment goal in mind, so if your goal changes, you must adjust the direct investment to ensure that it continues to align with what you are trying to accomplish. Entrepreneurs seldom start or buy a business to achieve a specific investment goal. They are typically driven by an array of other motivations. Also, the business is grown or built opportunistically, often moving in directions that enhance profitability or provide other rewards, without concern for if they are consistent with an underlying investment goal. Passion, rather than disciplined adherence to a strategy frequently influences decisions. Click here for more on this topic.

Direct investing is a big, complex topic that requires significant knowledge and understanding. First understanding these basics will start the discussion. Contact Mike for more information.