One of the hardest challenges we face in business, investing, and life, is knowing when to stop. When is it too soon? Is it ever too late? In this episode, we’ll dive into the two big questions you need to ask yourself before deciding to sell or walk away from an asset.
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How To Know When To Cut Your Losses
I’m excited to be with you after this Memorial Day weekend. I don’t know what you guys had going on, but we had a fantastic weekend over here at the Gibson household. We had an incredible dinner at our favorite restaurant called Houndstooth. They have small plates. Everything is unique. Even the drinks are something you can’t get anywhere else. They have this slow-cooked steak that every time I go, I get it, and I’m like in heaven. I had great conversations with some incredible friends.
I got to play high-stakes Poker. That is the one game or one thing that I do in my life where I extract value from other humans. I was thinking about this. Everything else I do, I give value. I try to give ten times the value in poker. I’m trying to extract value from other people, but everybody knows that. When they sit down and put their chips on the table, we are all going after each other’s money. It is a competition. I don’t feel bad if my grandmother sat down on the table with chips. As much as I love her, I’m going to try to get her chips and do everything I can to win.
All you competitive games players out there, do you feel me on that one? What do you like when you compete with your family or wife? When I go head-to-head with Kara in games, it is a pretty cutthroat competition. That is probably one of the only times we get into arguments. It is when we are playing games.
On Saturday night, we saw Top Gun 1. It is an incredible movie. It cracks my top five all-time. It is in the top ten. I got to think about my top ten. It cannot beat Braveheart or Gladiator. That is not even possible to beat those two movies. It was close to A Quiet Place, part two, but in a sequel beating the original when the original is such a classic. It is extremely difficult. If you guys haven’t seen this movie, you are going to want to see it, and you are probably going to want to see it again, but I’m going to go back to the movies with my other son and probably see it again.
On Sunday night, we went to a South Bend Cubs game. It is a Minor League team. I took the kids. They keep getting up and down. Finally, I said, “You’ve got one more chance. In the fifth inning, you have one time when you can get out. That is it. For the rest of the game, you sit your butt here and watch the game. You are annoying the heck out of everybody in a row. Every time you get up, everybody is got to stand up for you.” They had a great firework show after. We hung out at the pool. We went to golf, nine holes with my wife and my son. That was great. I had a great time with them. That is what we had going on this weekend. I hope you guys also enjoyed yours.
I want to dive into when to cut your losses in business and investing. One of the things I have realized on my show is that I cover a lot about what to do with your money once you got it to invest. I’m not teaching you guys as much as the experience and the things I have been through, creating five different businesses on entrepreneurial success and creating and making more money to invest. I want to start diving into my show on more aspects of how to make more money and decisions that you need to make in the entrepreneurial space so that I can serve you guys in both regards of where my knowledge base is at and all the experience that I have.
In business, the question is when to cut your losses. The idea for this particular episode is I’m on a Facebook Messenger conversation. One of the gentlemen that I’m hoping has been in a business that he opened up a brick and mortar established. He opened up several years ago, right before the pandemic lockdowns hit. It was open for a month, and the lockdowns hit. He is in a college town where there was a lot of foot traffic, but now a lot of the college kids are not there. They are taking virtual classes. The foot traffic was like Wall Street, and now, it is not.
Here are two questions when you are facing tough decisions about cutting losses in a business. I want to have you guys ask these questions yourself when you run into this situation, or maybe you are in this situation right now. Question number one, what are my chances of returning to positive cashflow? He is losing over $3,000 per month. He had never made a profit in several years. The foot traffic is 5 to 10 people per day. It doesn’t look too good to me.
Number two, do I have the emotional, physical, and spiritual energy to drive this back up to positive earnings to profitability? If the answer is no to both questions, you have an easy solution and answer. You got to figure your way to get out. What does that look like? Let’s say that you are in a lease like he is. He is on a five-year lease. He is a little over two years. There are three years left on the lease. This is tough because you signed a contract, and you are responsible for paying the remainder of that balance, or are you?
Here is what I know. I own property. I don’t own a lot of commercial property. I own self-storage facilities, where people enter into leases, but I don’t own any brick-and-mortar commercial locations. I do own a lot of residential property, and people bust their leases on me. That happens quite frequently. What do I do?
Here are the things you got to consider. Number one, if you decide to cut your losses and say, “I’m out,” how do you want to approach it with the landlord? There are two ways you can go. You can go dark, lock up, and say, “I’m out.” Tell them you are closing up. You have no cash, and you are out of business. That is one way you can do it. I don’t know if that’s the best way. The best way, in my opinion, is to have a sit-down conversation with your landlord and try to arrive at a reasonable buyout where you are going to settle and pay a certain percentage or amount of the months left in the lease to be able to close out that contract.
If your landlord is reasonable, this is the way to go. Have a face-to-face conversation and work it out together. If they are a douchebag and they’re completely unreasonable, which is certainly possible, you can say I’m out. You can take your chances that they take you to court. If they take you to court, you are potentially going to be on the hook for the full thing, or the judge is going to create a settlement because the judge is going to look at it and say, “This person went out to business. They don’t have much cash to pay the remainder of it. That is why they closed up shop. We are not going to hold you to the entire lease.”If your landlord wants you out and they’re completely unreasonable, just go dark and say “I’m out.” Click To Tweet
The landlord is going to be able to re-lease that property sometime in the near future, which is going to create and reestablish their cashflow on that particular building. My thought would be that you could do either way. I like to be upfront and honest with people and try to work things out again if they are reasonable.
In general, the big overriding question you got to ask yourself in both business and investing is, did the asset become impaired? What does that mean, impaired? Is there anything that changed within the asset itself, market conditions, or maybe even with you personally, where the long-term is impaired, the ability to create earnings is now impaired?
There are different scenarios where assets can become impaired. Let me give you some additional examples. Several years ago, we had a brick-and-mortar establishment, our first one. It was cranking. We were doing great. About a year in, I get bored. I want to expand. I want to go open up a new market. I went down and opened up a new brick-and-mortar location in Indiana. Penn to Indiana is about a 50-minute drive from my house. There was a team of five of us that went in. Everything seemed great. I put up most of the money for the build-out, but I did not sign the lease because I was already on the lease. I wanted to mitigate my risk by not being on the lease in case it didn’t work out.
It ended up, about several months in, five of us dwindled down to two of us. We had a $ 3,600-a-month nut, and our sales were maybe profiting from $500 to $1,000 per month. We are losing almost $3,000 per month. It did not appear that we had any reasonable chance of returning to positive cashflow. I did not have the emotional, physical, and spiritual energy to drive it back up to positive profitability.
I told my partners, “I’m out, and I would encourage you to get out.” They agreed. They walked away from the lease, and the landlord never pursued them. I walked away in terms of not paying any more monthly expenses. I went and opened up a small location in a gym. I was only paying $600 per month. I was very easily able to sustain that and create profitability at that new location because I wasn’t biting off a lot more than I could chew.
Sometimes it is okay to bite the bullet, take your losses and move on. I feel like it is pride and ego. Men, in particular, want to be respected. One of our highest needs in life is that we want respect. Women want to be loved. That is their number one need. An alpha female is a type-A and a driver. They are the unique exception where their primary need is to be respected. Men that are more feminine in nature, their feminine side is higher than their alpha sides. Their primary need is loved. It can go both ways in terms of men needing either respect or needing to be loved depending on how they are wired, but overall, for the predominantly biggest amount of us, we want respect.Sometimes it’s okay to drop your ego, bite the bullet, take your losses, and move on. Click To Tweet
What was holding back this gentleman that I was talking to on Facebook Messenger, in my opinion, is that he was feeling like he would not be respected if he admitted defeat, closed up shop, and let it go. I told him, “Pride and ego are costing you $3,000 per month. You can close up shop and get out of this. You don’t appear like you have the yes answer to either of these two questions that we went over. Do you have a reasonable chance of returning to positive cashflow?” After several years, he is still losing $3,000 a month. I would say, “No.” Two, do I have the emotional, physical, and spiritual energy to drive this back? I don’t think that he does that because he wasn’t all that excited about going back on a daily basis, driving that business.
When an asset becomes impaired, that is when we got to look at making some changes. Stocks sometimes drop because the market is fearful, over-reactive, and irrational, like what we are seeing right now. Sometimes stocks drop because the company’s future growth prospects have been impaired. Netflix lost 200,000 subscribers. Why? Their business model is being impaired by the competition that is eroding them from all the other streaming platforms. That is a stock that dropped a lot because of this loss of subscribers in this impairment, and it doesn’t look all that promising that it will come back.
The leadership can make some changes, reinvent itself and make a comeback. That is possible. I don’t know. I haven’t studied that company enough to be able to tell if that is in the cards. I wouldn’t touch it unless I was sure that they could make a comeback. When your house drops in value that you own, do you go out, rush out and sell that? No, you don’t. You hold on. You wait for the market to recover.
Just because an asset drops in value, it doesn’t mean that we automatically need to unload it. Just because a business is down in cashflow and it is not positive cashflow, it doesn’t mean that we need to let it go and say, “I’m out.” There are going to be times in your businesses when you don’t see positive cashflow, and that does not mean that your business is impaired. It could be a short-term challenge or cyclical in nature, but it doesn’t mean that you need to cut your losses and say, “I’m out. We had a couple of bad months.”Just because an asset drops in value doesn't mean that you automatically need to unload it. Click To Tweet
You got to be able to make the distinction between short-term drops in business and earnings and long-term prospects for growth and profitability. I’m always thinking five years, maybe even ten years out. Ten years is hard to think that far out at anything that we do, but it is necessary to have a vision of where you are going with your business and with the investments that you are making.
Crypto has dropped significantly over the last few months. We are all aware of that. Does that mean that I’m going to bail and sell out all of my cryptos? No, I haven’t sold a thing. I’m not panic selling. I’m not selling something because the prices dropped when the value is still strong, and the value and the growth prospects are still there.
Does the project still have long-term growth prospects? Do I still believe in crypto? Do I know where the crypto market is headed over the long term? Yes, crypto is here to stay. Crypto is not going anywhere. Crypto is going to change the world. I understand that because I have researched it. I understand what it is all about and how it is going to happen. We don’t know when we are going to see complete and total mass adoption where it is going to be utilized in our everyday lives. I know that it is going to be here five years from now. I’m not selling anything.
If a specific project becomes impaired, something is changed within that project, the leadership is billed on it, or the project is got an error in its code like Luna, where it is long-term. It is never going to recover. Those are the things that I’m going to sell off, dump, move on, take the hit and say, “This is part of the game.” You cannot be in business and investing for a multiple-year period and not see these things happen.
You are going to see negative cashflow at times in a business. You are going to see assets that you own that are great, valuable, and have great long-term prospects that drop in value. You are going to see things that were strong and were going well. They became impaired, and something changed. That asset has dropped in value, and it no longer does it have the same long-term growth prospects. Those are the things that I would be getting out of.
I would like to hear from you. If you have any questions about anything on this subject, send them to me by email or Instagram. I love to hear your thoughts, like, “I’m in a situation. I’m not sure what to do. Should I dump it? Should I move on?” Send me a story about, “I was in this situation, and here is what I did. I cut my losses, and I moved on.”
There has been plenty of times over the years when I thought I knew what I was doing, I had a great asset, and I made a great decision. It turns out that I did it, and I had to cut some losses. Whatever you do, if you got an asset, whether that is an asset as a business or a financial asset, and it is still got great long-term growth prospects, the key to building wealth is to buy great assets and hold onto them for long periods of time, and that includes your businesses.
You are going to have your ups and downs, but you’ve got to ride through those to get to the ultimate profitability, the cashflow, and the lifestyle that you are craving. It does not mean because something isn’t working temporarily, you are out, but you got to ask yourself these two key questions, and have that conversation, maybe seek out a coach or some guidance of a mentor or somebody that you look up to, and you respect their experience, bounce it off them, describe the situation, and see what they say.
A lot of times, I do that, and that confirms what was already in my gut instincts. You need confirmation to make those types of moves. Don’t hesitate to reach out to somebody that would be able to pour it into you. Most humans want to pour into other people. They want to be of value and service. They want to help mentor you. Reach out to those that you respect, and get that advice and opinions. You are going to be well served by not trying to do it alone and making those types of decisions yourself.
At the end of the day, I told this gentleman, “Don’t let pride and ego get in the way of your decision.” That is the same thing I had to tell myself before because I had businesses where I had closed up shop, and I felt like I was going to lose respect. That is a complete and total illusion that you have about whether people respect you or don’t respect you. What is most important is your future and protecting your cashflow, self-respect, and energy.
I hope this short lesson helps you, guys. I’m going to encourage you if you are in financial assets right now, we had an irrational sell-off. Now is not the time to panic selling and cutting your losses. What we are experiencing right now is an irrational market. We are seeing a market that went down big because there was so much greed. Many people were borrowing money to buy financial assets that they couldn’t afford to buy on their own.
It goes great when things are going up because you make more money. When you are leveraged and borrow money, you can get much higher exponential returns, but when it is going down, it is very painful. That is what we are experiencing right now in the market. It is not the time to be cutting losses. Have a great day.