Last week, Wiet and I were preparing some documents to help members of Beyond Entrepreneurs: Mastermind successfully keep track of their Venture Fund investments.
Part of the portfolio we recommend is dedicated to higher-risk investments that have the potential to dramatically move the needle in our financial lives. In short, they have explosive upside potential.
We call those “Venture Fund” investments.
One of the columns we asked our members to pay attention to is called “Exit Price.”
Here, we ask them to write down the point at which they’re going to sell their Venture Fund investments.
Ultimately, our goal is to transfer gains from our Venture Fund to low-risk opportunities that pay us income for life.
But in order to do that, we need to know when to sell those investments in our Venture Fund.
It’s a step almost all investors forget to do.
In fact, most people invest in something – and pray that it goes up. They have no idea when to sell – and they panic when their investment temporarily falls in value.
But one of the most important decisions you can make when you invest in something is to determine in advance when you’re going to sell.
Most of the time, you will want to exit an investment when it no longer has the upside potential you’re looking for relative to the downside.
In other words, we sell an investment when the reward we could earn if it goes well no longer justifies the risk we are taking.
Take an example I’ve used in the past: Bitcoin.
I’ve said before that Bitcoin has a shot of establishing itself as a digital reserve asset – a store of value and wealth, just like gold.
If all the bitcoins in the world were to someday be worth even half of what all the gold in the world is worth, one bitcoin would sell for approximately $190,000 (based on the amount of available gold today).
That means that from its current price today - $9,400 – bitcoin could potentially increase in price 20 times.
But if the price of one bitcoin reaches $190,000, would it still have the same upside?
No to me... because by then, it would only need to double to start rivaling gold.
And with what I know of bitcoin today - that my downside could be 85% or more - I wouldn’t risk money on it if the upside was only 100%.
So my current plan would be to sell my bitcoins at anywhere between $190,000 and $250,000 if everything stays the same.
Things are of course not likely to stay the same, which is why you can change your investment thesis along the way, to account for new variables.
For example, imagine that in ten years, the Indian government faces runaway inflation, and decides to officially accept bitcoin for payments.
Does that change our hypothesis regarding bitcoin? Of course.
The move would likely create demand for bitcoin not only as a digital store of wealth but also as a transactional currency for over a billion people.
We would then adjust our exit price for bitcoin accordingly (likely higher).
Until then, we base our assumptions on what we know, today.
Now, you can’t expect to know in advance exactly how much something is going to be worth in the future. All investing requires some degree of uncertainty.
But you can use sound judgment and rational thinking to get a good idea of the potential it could have.
If you currently have Venture Fund investments or are looking to invest, ask yourself this…
- What do I think this investment could be worth in the future?
- Given the downside risk I have, is the potential reward worth it?
- And finally – when will this risk no longer be worth it?
Answering these questions requires a bit of work – but it’s critical to being a successful investor.
It also helps you avoid the emotional rollercoaster that comes with seeing prices rise and fall.
And if you do it right, it could pay off beyond your wildest dreams.