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Rule #1 we aim for a 15% return because anything lower is just too low to account for the risk of investing.
I learned when I was doing venture capital that the rate of return we had to shoot for in a early stage business (assuming everything worked as planned) was about 50% per year. We did that because for venture capital in a typical portfolio of ten businesses, 2 of them would fail completely, 5 would do far less than expected, and 3 would succeed or exceed expectations.
In order to maintain a rate of return that was acceptable, we had to be sure that on the 3 that did well, our rate of return was astronomical to pay for the rest of the investments that did not do so well.
First, we begrudge losing money on anything. We do our homework to make sure we are certain we won't lose money.
Then, if we do lose it, we expect that we will exceed expectations on a few investments, and those excess returns will make up for the losses.
If we settle for valuations of businesses that are based on a lower rate of return like, say, 8-9%, we will be getting in at higher valuations and thereby have less upside because we bought in too high. With less upside potential, we are going to have a lower overall rate of return because there won't be so much profit to fill in the holes created by the occasional screwup.
Keep your default rate of return (or "discount rate" if you're using Investools) at the expected overall rate of return in your portfolio. Yes, it will make it harder to get into some good deals -- but you will be glad you were patient when the occasional deal you did get into launches to the moon because you bought in at such a great price.
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