Be a business collector

I have long said that entrepreneurs should make better investors than the salespeople who hold themselves out as experts in the financial services industry. The entrepreneur never really thought of what they were doing all these years as investing. They just had their heads down building a business. But every decision they made—to rent or lease property or machinery, for example, or to hire that superstar salesperson—is really an investment decision.

This week’s essay, like my book, is written directly to the entrepreneur who is investing outside of their business. 

Why do I think that entrepreneurs make better investors? Because at its core, successful investing is allocating capital to its most efficient use. In plain English, this means that a dollar out needs to bring more dollars in. You had to work through this concept when you hired your first employee, invested in equipment, or decided to expand. Investing in a business whose shares trade on a stock exchange is no different from any other investment—you need to understand what kind of return to expect, and whether it makes sense to put your hard-earned capital at risk.

Investors vs salespeople

While you might expect the financial advisors and sales reps who come knocking to have special expertise, they often have far less experience making investment decisions than you. They might be really good at reciting return statistics and buzzwords handed to them by a marketing department, but chances are they haven’t ever built a business and risked their own capital to do so. If you run a business, what you do every day is investing. What they do every day is sales.

Salespeople and marketing departments will often try to create an aura of mysticism around the investment process, making you believe that you can’t do it without them. 

Once you have money, you are going to be pursued by financial advisors who promise to give you access to “institutional quality” managers who can build a portfolio out of “non-correlated” assets such as private equity and hedge funds. You will be told that these “exclusive” opportunities are only available to the world’s wealthiest “family offices” and that through their contacts and prestigious client list they can help you access these “world class” managers.

I’m going to let you in on a little secret: it’s mostly bullshit.

I implore you: when faced with investment industry jargon and sales pitches, don’t forget the common-sense, street-smart values that got you here.

The fact is, you know more about investing than a portfolio manager who went to an Ivy League school and never put their own capital at risk to build something. Because at its core, investing is about understanding businesses.

Don’t let the sales guys intimidate you with numbers and charts. It’s either based on the past (with data they cherry-picked to make themselves look good) or their own future projections (which are even more useless). If you hear talk about “alpha,” “information ratio,” or “tracking error,” walk out the door and do not return. They are trying to baffle you with bullshit. 

Collect great businesses

I want you to think of your investment portfolio as a collection of businesses. It’s that simple.

This is how you’re going to construct a moat around your wealth. You’re going to build a collection of businesses that you’ll buy into at decent prices. You’ll only buy a business if you can be reasonably sure that it will bigger and more profitable three to five years from now—that if the stock market closed down for that time, you’d be happy to continue to own it. That’s it.

If you’ve made wealth by building a business, you likely did not choose your industry with any significant premeditation. Often it’s something you may have lucked into, or a niche you noticed needed filling, or something you inherited from a parent. When you started, you probably didn’t analyze the industry’s economic structure in any significant depth. You just got to work.  Throughout the years you had to deal with all of the negative aspects of the business—whether it was cyclicality, capital intensity, labor relations—any number of things. You dealt with them because you had no choice.

Now that you’re building up your empire outside of that business, you get to choose the problems you want to deal with. You can pinpoint specific industries, companies within those industries, or management teams you respect. And in doing so you can avoid all sorts of headaches and potential landmines. If you collect stakes in large, financially stable, dominant companies, a whole world of worries disappears.

Let’s say you were designing the ideal business from scratch today—what are some of the characteristics you might want to see? To name just a few:

-       low capital intensity

-       a diversified supplier and customer base

-       selling a mission critical product to a stable and reliable customer base

-       low capital and financing needs

You can own a diversified basket of businesses that have those characteristics. It’s quite amazing in that you can own perhaps the world’s best asset for long-term growth—common stock—and at the same time have the benefit of full liquidity. You can generally sell most common stock positions within minutes while markets are open, and the only reason it would take that long is because you may not remember the password to your discount brokerage account.

It’s a pretty remarkable process, when you stop to think about it. The investment industry really does take the stock market for granted when it tells you that investing in public stocks is too “boring” and convinces you to add complexity to your portfolio with more exclusive and exotic alternative investments. These instruments offer more benefits to the company selling them than they do to the people they are being sold to. 

As Warren Buffett famously said, “I am a better investor because I am a businessman, and a better businessman because I am an investor.”

The world’s greatest asset is owning a piece of a successful business. It really is that simple. Don’t believe the hype.