I can’t work without my morning brew.

If you’re one of those people who can sip on an herbal tea to get your day started or just grab an apple and go, more power to you! That’s just not me though.

For years, I’ve been a big Starbucks (SBUX) fan, and I still frequent the chain on the road. But I recently relocated my office in Spartanburg, South Carolina, near a coffee shop called Spill the Beans.

It’s a fun, clever name. But that’s not the only thing noteworthy about Spill the Beans, however. The conversation is, too.

Most of the regulars there now know I’m a Wall Street writer. It’s a tight-knit community, so they got to know me quickly when I kept showing up.

Between the volatile stock market and my association with President Trump, there’s always room for conversation. (That and the occasional friendly debate.) And Monday morning was no exception.

While waiting on my dose of caffeine, I began talking with Chris, who owns the place. One topic led to another, and I ended up sharing my experience as a multiunit franchisee of Papa Johns.

That’s how I came to ‘fess up about one of my greatest business failures. And now you get to hear the story too.

As painful as it was, that lesson made me a better investor. I believe it could do the same for you.

How Difficult It Can Be

Back when I was a commercial real estate developer, I didn’t always sell the properties I built. Sometimes I kept them to rent out, including entire shopping centers.

One of my friends, “Dean” – who I wrote about a few weeks ago – was running a very successful Blockbuster Video franchise chain at the time. He had over 150 stores by the time he sold it all for over $150 million.

Another friend, Brian, owned over 100 stores for Aaron Rents (I built around five of them for his franchise). That made him so much money, he went on to start his own venture capital firm.

Clearly, then, there was money to be made in the franchise business. So when yet another pal (and tenant) who ran Papa Johns locations told me I should go for it…

I did.

I had space to fill up in one of my shopping centers (in Chester, South Carolina), and so I rented it out to myself. Then, over the course of two years, I added another seven Papa Johns stores until I had four in South Carolina and four in my northerly neighbor (of North Carolina).

Business was booming!

But that didn’t mean it was good.

You see, I had zero experience in running either a franchise or a pizza parlor. And I guess I didn’t do the proper research into either before I got started.

Even though I always, always investigated every property and every tenant before I signed a deal… I didn’t take the same precautions for myself as a franchisee. I just assumed it would be easy.

They say to never assume, and they were right. I was left overwhelmed by the challenges of hiring managers, overseeing mostly teenaged employees (one of my disgruntled employees brought a frozen deer carcass into the store’s freezer), and controlling costs.

Sure, there were extenuating circumstances I could lay some of the blame on. But the bottom line is this: I lost over $1 million on this pizza experiment, all because I didn’t stick to what I know.

I’ve never forgotten that expensive lesson in staying inside my circle of competency. And you should take it to heart as well.

Know Your Investments

Maybe it seems obvious that you shouldn’t buy up a business you don’t know a thing about. But how many times do you do the same exact thing with stocks?

Maybe you heard about it from a colleague. Or your brother-in-law is making money hand-over-fist on some company. Or the news is telling you that shares of ABC are on fire and forever will be.

But that doesn’t mean it’s automatically right for you. If you want it to be right for you, you need to first understand:

• What it does

• Why it does it/what its mission statement is

• How it does it

• Where it does it

• Who runs it (very important)

• When it began/what its history looks like

• How you can profit and what your return on invested capital is (extremely important)

If that sounds like a lot of work, it can be. However, it’s work that pays off, keeping you from making foolish investments in the first place.

It also keeps you from panic-selling out of positions when volatility sets in, as it always eventually does. Because when you really know what you’re holding, you know what it can actually sustain.

This is one of the many reasons why I touted companies on Tuesday that focus on specific services or products. To requote Chris Zook and James Allen from Repeatability: Build Enduring Business for a World of Constance Change:

Most of the businesses… with the longest continuous lives stayed entirely focused on a specific niche that had evolved gradually since the company’s founding around a relatively simple original model.

That allows them to build up bigger, better “moats” to protect their kingdoms from competing forces. And it allows you to better understand them.

Going back to my friend, Chris, he serves great coffee at Spill the Beans (come join me when you’re in Spartanburg). But he also fosters great community.

Customers know they won’t get the same personal touch if they go somewhere else. That’s Chris’s simple but effective moat.

For the record, this doesn’t mean he can’t ever expand his coffee business into other communities – only that he’ll need to research them until he knows them just as well as he knows his base camp.

In the same way, feel free to expand your circle of competency at any time! Explore. Investigate. Study.

Just don’t commit your money until you know what you need to know.

Happy SWAN (sleep well at night) investing!

Regards,

Brad Thomas
Editor, Wide Moat Daily

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Have you been influenced to invest in something without researching if it was right for you? Write us at feedback@widemoatresearch.com.