The Restaurant Analogy for Investing Strategies

I was reading Marc Lichtenfeld's "Get Rich With Dividends" on recommendation by a fellow dividend investor and came across an analogy that captures the debate between dividend investing and growth investing. I want to share it here.

The Proposal

Imagine I come to you with a business proposal. I'm starting a new restaurant and I'm looking for investors to raise capital. I offer you a 10% ownership stake for S$100,000.

We expect the business to break even in the first year. In year 2, the business is expected to earn a profit of S$100,000. In year 3, we expect the business to earn a profit of S$200,000.

Now, I offer you two different ways to share in the success of the business as a shareholder.

Plan #1: The Exit Strategy

Under this plan, we will re-invest 100% of profits into the business. We will aim to grow as aggressively as possible until we hit a target S$1,500,000 in annual sales. Then, we will sell the entire restaurant at two times sales for S$3,000,000. 

Your payout will be 10% of our sale worth S$300,000 once this sale occurs.

Plan #2: The Cash Flow Plan

Under this plan, we will re-invest 50% of profits into the business and distribute the remaining 50% of profits to our investors (including you). 

Which Plan is For You?

Both plans are valid investment models, plan #1 is a classic "growth investing" approach while plan #2 is an "income investing" approach. 

To me, plan #1 is rife with uncertainty and built on a future promise which may never come true. Would there be willing buyers at our target price and valuation? Would the business grow to that extent? My entire return on investment is based on hope(speculation) and a future event I cannot control.

Plan #2 is more tangible and starts rewarding me almost immediately. The business becomes a valuable asset that keeps paying me as long as I own it. I do not need an exit strategy as long as my dividend payouts keep coming. 

Faced with this choice, which plan would you rather take?

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