IRR: Internal Rate of Return (for simpleton’s)
I am a simpleton. I know I am, so no sense trying to debate or hide this fact. I was asked the other day what I would consider a good rate of return on my investment. Well, it’s all relative as the smartest guy in the room (Warren Buffett) would say.
My Dad would say, “so long as I don’t lose money, it’s good.” This is probably what Mr. Buffett would say as well - if it came down to it.
A good rate of return on “safe” money would be the return on Treasuries, but who knows nowadays. A good return on investment or IRR for a risky land deal (which I am often in as a part of my business) is 25%. A killer Internal Rate of Return (IRR) is 40% - which ironically is doubling your investment in just 2 years.
Everything else is “close nuff” - as the genius Lonnie Skruggs once said. For those who don’t know who Lonnie is…he is the Godfather of mobile home investing. I used to be in the mobile home business, but really, his lessons can be used in anything anywhere and he is a genius…no other way to put it.
- Doubling your money in 3 years gives an internal rate of return of 25%.
- Doubling your money in 2 years gives an internal rate of return of 40%.
- Both are darn good and nothing to sneeze at…
- Use leverage (debt), and that only magnifies your return of your investment
Also, both are VERY difficult to obtain. Regardless of what anyone tells you, it is the vast minority who obtain these returns year over year. Some might do it one year at time - which is not that difficult, but most will not achieve this in the long-term.
The rule here is that a return on investment or internal rate of return (using time value of money) is relevant to what you require as an investor to the amount of risk taken. For me, I want the highest return possible in the shortest period of time. What makes the smart investor smart is they want this, but ALSO want the lowest risk possible for that return. It’s the balancing act that differentiates folks. Everyone wants huge returns, but what risk are you willing to take to get it. Oftentimes, it is NEVER worth the risk of long-term capital loss to achieve a few extra percentage points. In the recent past, many professionals forgot this rule (not guideline, but a rule)…
Do your homework and listen to your gut when making your investment. This will always yield the highest possible return in the long run.