The Number One Rule of Investing

“He that can have patience can have what he will.” – Benjamin Franklin

Want an investing rule that will help you make more on your investments in 2007? How about a rule that can make you a better investor for decades? Well, I have one for you – one I learned the hard way.

Oddly enough, I learned what I call the “number one rule of investing” as a businessman. It wasn’t until after I’d used it to earn a small fortune in business that I applied it to investing … where it also generated amazing gains.

Let me tell you how I came across this key to investment success …

When I first started to negotiate deals, I thought all I had to do was make the numbers add up and show the people sitting across the table from me that they could make a handsome profit by investing their money in my company’s development projects. So when the three businessmen from Hong Kong came knocking on my door, I greeted them with visions of a big commission check landing in my bank account within days.

I sat them down in the conference room, and went over the basics of the projects we were offering to them. I concluded the meeting by inviting them to dinner. I took them to the best steakhouse in Baltimore … with an unsigned contract tucked into my breast pocket. I was sure that, at this point, signing it was just going to be a formality.

The dinner went exactly as planned. They were having a great time. Toward the end, I asked them if they’d had a chance to further consider our offer. They replied that it was very interesting.

“Great,” I said. “I just happen to have the contract with me. Would you like to sign it?”

They smiled and said that it was a splendid idea – that they were very glad I made this suggestion. Then the hemming and hawing began …

“I forgot my reading glasses.”

“I’m not sure my English is good enough to fully understand the contract language.”

“We do not want to spill anything on this very important document.”

And on the apologies went.

I shrugged. I was a little surprised, but felt nothing approaching panic. We finished the meal and made plans to meet the next day.

Our next meeting was a rerun of the previous evening. The excuses were trivial, but accompanied by the sincerest of apologies.

I still wasn’t panicking, but I was nonplussed. “Fine, we’ll stay in touch,” I said.

And we did. Over the next few months, I sent them charts, PowerPoint presentations, explanations of explanations, etc. Nearly six months later, I got one of the politest letters you’ll ever see. It talked about the wonderful time they had in Baltimore. How nicely they were treated. What a great company we had. What a pleasure it was to discuss business with us. But … they were no longer interested in pursuing our investment opportunity.

I didn’t understand what drove their decision. Why were they leaving so much money on the table?

The following year, I met with three more businessmen in Kuala Lumpur and then Jakarta, where our discussions turned serious. This time, I was less confident that the numbers could speak for themselves. I explained our projects more carefully, and encouraged our prospective partners to ask questions. They did, which I saw as a positive sign that we were making progress.

But I didn’t try to “close” the deal. I merely suggested that we should reassess it when we all got back home.

Back in the states, I sent e-mails to the three men, restating the numbers and profit projections and including timelines based on various start-up dates. Still, their interest in the proposed projects began to wane … slowly at first, and then faster.

I tried desperately to rekindle interest. I suggested various financing alternatives. I made bigger promises. I urged them to act sooner rather than later.

Ultimately, I threw up my hands in frustration and called it quits.

And it was just by chance that I ran into an old friend of mine at about this time. The son of a missionary, he grew up in one of the least-developed regions of China – Anhui Province.

I told him my story. How my company had developed a way to use proven technology that would pay back an original investment in a year. Anything after that would be pure profit. But the companies I’d met with seemed to shy away from making a deal … and I couldn’t figure out why.

My friend said he was pretty sure they loved the idea of investing in our projects … at first. But the more I pushed to close the deal, the more suspicious they became. Until, through my insistent badgering, I convinced them that the deal was bogus.

He said, “You bargained like a street vendor who’s afraid that once the tourists walk away, they’ll never come back to buy your cheap imitation watches.

“You need to let the deal advance on its own. When it’s ready to move an inch forward, it’ll move an inch forward. When it’s ready to leap forward, it’ll make the leap. When it’s ready to make you money, it’ll make you money. If your business is the real deal, it’ll blossom on its own. All you have to do is wait.”

This was contrary to everything I had learned about doing business. But it was coming from a person who had an unerring sense for how things to get done in that part of the world, so I took his words to heart.

On my next trip to Asia, I took the long view in my business discussions. And it was amazing how things began to fall into place.

I took my time with the people I met with. I asked them a lot of questions (rather than encouraging them to ask me questions). I dropped any mention of a timeline. I stayed longer in the places I visited. I had more meetings, but I let them bring up business matters. Sometimes they didn’t, and we talked about our families, politics, sports.

In other words, we got to know each other.

I gave them full freedom in dictating the pace of our negotiations. And if it seemed that the pace had stagnated, I let it alone.

As my friend told me, “You need to let the deal advance on its own.”

I got my first deal with these people 11 months after that trip. I got my second deal two months later. A third came soon after. Not all my discussions turned into done deals … but enough did to get our company firmly established in the Asian market.

When I segued into investing, this lesson became my number one rule: Be patient.

And that’s not the only lesson I learned in business that can be applied to investing. The principles are basically the same … and I can sum them up in these three rules.

  1. Don’t fall for a good story and lay down your money there and then. None of my prospective business partners did, and neither should you. Every good street vendor has a good story to draw you in – but that doesn’t mean his watches are any good.
  2. Take your time in getting to know a company. You can read and evaluate the essentials on a company in a matter of hours. But you need more than a day or a week to really understand its ins and outs – so don’t expect to invest in that timeframe. Make sure the company you’re investing in is the real deal. Make the passage of time your friend, not your enemy.
  3. Check out the numbers but don’t fall in love with them. My long-ago held belief that numbers reveal the worth of a business deal – or investment – was only partially true. The numbers are important, but you should also consider the management team, the market the company’s in, the money they’re spending, the competition they’re facing, and so on.

But while these three rules have given me a valuable leg up on the market, combining them with my number one rule has made me – and my subscribers – by far the most money. I can’t count the number of times a company went nowhere after I’d researched it and put my trust in it … only to blossom much later. Here are some recent examples:

  • A small Texas real estate company I recommended to my subscribers in May 2005. In June of the following year, it still hadn’t made a cent. Then it began climbing. It’s now up 25 percent.
  • A mining company I recommended last November. Other analysts thought it was going to spike. Four months later, it was up only 15 percent. That’s fine … but it’s no spike. It’s since surged to over an 80 percent gain.
  • A shipping company I recommended last December. Over the following six months, it went nowhere. Then, in June, it finally began to climb. It’s now up 25 percent.
  • An airline company that went nowhere from February to September of last year. Now, it’s up almost 20 percent.

If I were impatient, I could have easily encouraged my subscribers to sell these companies at a loss or, at best, small gains. But I’ve been there before. I know a good investment when I see one (just as I knew a good business deal when I saw one). And I’ve learned that nothing good comes from trying to force the pace.

Of course, not all investments (or business deals) work out. And when they don’t, you have to be ready to cut your losses and move on. But if you do your homework, you should find that plenty of your investments will meet – if not exceed – your expectations … when given enough time.

And all you have to do is remember my number one rule of investing: Be patient. A stock will make you money when it’s ready (if it’s the real deal).

Now, how hard is that?

[Ed. Note: Andrew Gordon, ETR’s financial expert, is the editor of our new investment service, INCOME. Each month, he uncovers specific stocks that promise safety (first and foremost), along with much higher-than-average profit potential.]