When Life Gives You Lemons … Part I

… and then you make your lemonade. You have invested your pennies into your ingredients as well as your materials for your stand, signage, serving utensils, etc …

You are an investor. You have invested your capital into a business. In this case, you are investing in your own business rather than someone else’s, thereby making you also an entrepreneur. This comes with more of its own risks and rewards which we can delve into sometime at a later date (and likely will), but the concept is the same. You have taken your pennies and put them to work rather than setting them aside into your piggy bank.

Now, if you recall, we have discussed a few of the risks of saving. The risks associated with investing tends to be what I find scares people off before they really understand what risk means in this situation.

We already touched on one form of risk associated with investing. The risk that you will have no pennies remaining after purchasing everything you need for your lemonade stand. To begin, let us assume that is the case; you have spent ALL of your pennies purchasing your materials to set up shop. Now what do you have?

Think about it … what do you have?

In this case, you do not have nothing.

I have made this statement in this way intentionally. So … think about it.

What do you have?

You OWN your lemons, sugar, cups, serving utensils, lumber, poster board. These are called assets. They are things you own that hold some kind of value. The value may not be what you originally paid for them, but you still own them. The lemons will go bad at some point, and so you will need to use them pretty quickly or give them away or sell them to another lemonade stand. The sugar will last longer and could be used for any number of other things … desserts, bread, science experiments — that is up to you and your imagination. The lumber may need to be reworked and used in some other way because your stand is crooked or ugly, or perhaps you never even got to building the stand because you weren’t sure how to do it or you didn’t have the tools required for the task. Your cups, assuming they are either still packaged up in a sanitary manner or can be cleaned and re-used, are not going to go bad.

The point to all of this is that you have options. Perhaps you sell everything off to another person because you discovered through all of this that you really have no interest in making and selling lemonade. Perhaps you re-imagine what you want to sell and instead decide to begin baking. In this case, you will need to source additional materials, which means obtaining additional funding (get back to mowing lawns and earn some more pennies or borrow from your parents or your friends’ parents, for example). You can push through and do your best with what you have chosen to start up, i.e. making lemonade, then take your earnings and either save in your piggy bank or invest in another business (or both!).

So, again, what do you have?

You have assets. Their value may or may not be what you initially purchased them at. Perhaps everyone on your street decided it was a good time to make and sell lemonade. So your market is oversaturated.

Remember though … what you own still has some sort of value.

Do you still have those lemons? How much did you buy those for? Do the kids across the street need more lemons for their stand? Is the grocery store out of lemons since everyone on the street decided they wanted to sell lemonade? Now you have an opportunity to sell your lemons to your competitors and at least recoup your losses. Hopefully you can make a little more and get the best price for your lemons from whichever one of them bids the highest.

What else can you do?

You could partner with one of the other lemonade stands. Perhaps instead of selling your lemons to them, you support their growth by providing them with the materials you already own, and negotiate to earn income from the stand. Now you have passive income from your investment. You are earning dividends from the lemonade stand that you have used your resources to support. Now, of course, you will hopefully have selected the stand most likely to actually grow and sell and report earnings and pay you in good faith. Assuming all of this is the case though, you can take those pennies you are now receiving from that stand, then save those pennies in your piggy bank, or take those pennies to build a new stand (cookies or cupcakes perhaps), or buy into another stand.

If you build a new stand selling another product, or you buy another stand, or even if you put those pennies into your piggy bank, you are diversifying. Your pennies are not all only held in one place. Those assets are spread out into other products and/or services. While your lemonade stand does well and pays you during the summer months, you do not see much during the winter months. However, your cookie sales jump during the winter months, which means you have consistent income throughout the year.

As your lemonade and cookies stands grow, perhaps you want to invest more money into them. Perhaps your partners decide they no longer need or want to share the earnings with you and so they buy you out. It is possible that for one reason or another those stands close because the other kids get sick or move away.

These are all possible scenarios. It is also possible though, that they will continue for several years. Perhaps the stands are taken over by new neighborhood kids who continue to do the work and so you continue getting paid in these scenarios. Hopefully, you continue taking that money and looking for new ways to diversify your assets. Now, as you see the ups and downs of one market (i.e. lemonade), you hopefully have stands in markets that are up and down at different times. This is one way to mitigate the risks associated with investing. There are others, but this simple illustration should offer an explanation as to why diversification is considered so important in the world of investing.

Determining how much to put into your piggy bank, how much to rely on your lemonade stand and your cookie stand can be the next tricky part. As well as determining what other investments would complement your portfolio can become tricky. This is called asset allocation and we will look at this concept more deeply in the coming weeks as well.

Until next time,

~Jacqui O. ✨