By Dr. Jim Dahle, WCI FounderWhen speaking to novices and potential white coat investors, I often use a simple slide that lists some “good investments” and some “bad investments.” The bad ones include things such as:
- Individual stocks
- Actively managed mutual funds
- Whole life insurance
- Speculative instruments, like precious metals, crypto, empty land, and Beanie Babies
The good ones include:
- Stock index funds
- Bond index funds
- Well-managed real estate
- Small businesses that you control
While those lists aren't meant to be some kind of doctrine, they are useful for an overwhelmed novice. In today's post, I want to talk about the last one on the “good” list: small businesses that you control.
What Are Examples of Small Businesses That White Coat Investors Control?
This could be a long list, so I'll just hit the highlights. It includes:
- Your practice and any sort of medical side gigs you do, like moonlighting, consulting, and expert witness work
- Medically related businesses, often specialty specific: For example, free-standing EDs, urgent cares, radiology centers, outpatient surgical or procedural centers, dialysis centers, infusion centers, dental labs
- Content-based businesses, such as blogs, podcasts, YouTube channels, and monetized Facebook groups
- Franchises, both food and non-food related
- Convenience stores, gas stations, car washes, and similar brick-and-mortar businesses
- “Traditional” entrepreneurial startup businesses that offer a new product, service, or software
More information here:
10 Reasons You Should Own a Business
Buying into (or Selling Part of) a Business
Why Are Small Businesses You Control a Good Investment?
The best investment that many doctors ever make is a small business. While they may require a lot of hassle, work, and risk, potential returns are also higher than just about any other sort of investment. Trees don't grow to the sky, and businesses can only grow so big. However, a sapling has a lot more room to grow than a mature oak.
Small businesses can have very high rates of growth for many years. Given their size, illiquidity, and risk, they often trade at very low multiples. A business worth 5X profits has a yield of 20%, and, with growth, it can have a total return much higher than that. Every additional dollar of new profit is really $6—that dollar you made plus an additional $5 in additional value for the business. Small businesses may also operate in an area without much competition. It's not that hard to be the biggest fish in a small puddle. You don't even have to be the first to recognize an opportunity; you can often overtake the first mover advantage by working smarter, harder, or both. While entrepreneurism is not a particularly reliable pathway to wealth, it is a route that many people have taken, and you really don't know how well you or your idea may do until you try.
What Kind of Returns Are Possible?
The sky really is the limit. Some businesses can be bootstrapped. This is essentially how WCI was built. There was never a big need for capital, so we never put in any or borrowed anything. Plenty of sweat equity went in, but all we ever risked (outside of running conferences at expensive hotels) was our time and money we had already made in the business. It's kind of impossible to calculate any sort of return on that investment, but few would argue it didn't pay off.
Other small businesses we have been involved in have had highly variable returns. One promised “the world,” projecting that a $25,000 investment would soon be worth over $1 million. By my calculation, it's paid us $12,500 and is currently worth something like $20,000. The principals still have high expectations, but I don't think even they expect my investment to ever be worth $1 million. Another from which we recently exited ran for six years and chalked up an annualized return of 191%. Per year. Pretty awesome. Too bad I only invested a small amount.
The highest annualized return I've had from an investment is over 1,000% per year, but that was an even smaller amount invested. None of these were simple “set it and forget it” investments. They all required me to put in some work and expertise, and I couldn't even invest a lot of money in them. But the calculated return was certainly awesome, even if not scalable or reproducible.
More information here:
How to Actually Get Paid as an Expert Witness (or Any Other Side Gig)
TikTok Doctors Are Creating Millions of Fans and Making a Huge Impact on Social Media
What Is the Key to Success?
There are two keys to success. The first is that you need to have interest in the business. This is going to eat up a significant chunk of your life. If you don't enjoy it, it's probably not going to work out very well. The second is expertise. The more you know and the more efficiently you can run this business, the better it is going to work as an investment for you.
As a doc, you have valuable knowledge and information. Various companies want that knowledge and are willing to pay you for it. If you're interested in starting a side hustle as a paid survey-taker while also making a difference in the medical field, check out our favorite physician survey companies today!
What do you think? Do small businesses play a part in your portfolio? How? How have yours performed for you? What would you do differently if you had it all to do over again?
Dr. Dahle, your article about the pros and cons of investing in small businesses is fantastic! I’ve been thinking about starting a Notary Public business in Alberta as we are getting ready to move there and would appreciate any resources you recommend for business planning in the Notary public services field.
I forgot to mention that we are already running a business in Saskatchewan; however, it took us four years of preparation.
Sorry, don’t know much about notary businesses. Seems a hard way to make much money given that your bank usually offers that service for no additional charge.