Entrepreneurship is like investing. It is often said that to be a successful investor, you have to think like a business owner. Technically it makes sense. After all, when you buy stocks, you are becoming a part owner of the business you are investing in.
But the similarity goes beyond this. There are many ways entrepreneurs are wired towards making smart investment decisions. Unfortunately, many entrepreneurs make lousy investors in real life. Here is why.
5 Ways Entrepreneurs Should Excel in Investing
1. Decision making
When you are investing, often times you have to make decisions about buying or selling a security quickly. You will also find that many of these decisions need to be made when the information you need is not complete. Entrepreneurs make these kinds of decisions every day. Another quality that separates an entrepreneur from normal investors is that they have the ability to make a quick decision, even if it is the wrong one, and stick to it. True, one can always make amends later if the decision turns out to be wrong. Most damage to your returns is done when you hesitate to decide, rather than occasional wrong decisions.
2. Using the Business Knowledge
Who better to assess a company’s operations and prospects than an entrepreneur who understands how businesses operates. Entrepreneurs are close to day to day action and over time they acquire deep understanding of basic attributes that makes for a successful business. Concepts like cash flow management, inventory turnover, the interplay between accounts receivable, inventory and accounts payables with the cash flow are very important for any business, whether it is your own small business or a publicly traded company.
3. Understanding Risk
Entrepreneurs assess risk differently than an average investor. For entrepreneurs, risk is often in the terms of missing out on a potential opportunity, while for normal investors risk is often expressed in terms of potential downside. As has been shown again and again, rewards are in proportion to the risk taken, both when you are running your own business and also when you are investing in a business run by someone else. Risk avoidance is not very profitable.
4. Playing for the Long Term
Investors underperform because they are quick to panic or get carried away. Successful investors always look at the long term and view any temporary hiccups through the lens of "how it affects the long term prospects". This is similar to building a business and growing it over time. Entrepreneurs do this by setting long term goals and taking incremental steps to achieve them. Surely, it is not all smooth sailing and many roadblocks and temporary setbacks are to be expected. The key determinant of success lies in how an entrepreneur reacts to the setbacks, changes his or her direction, all the while keeping an eye on the eventual goal. It is the same for any publicly traded company. A lot of things are not in control of the company, whether it be the economic climate, competitive pressure, technological changes or various other disruptions. Rather than considering these as fatal setbacks, an investor needs to review how the company reacts to these short term pressures. This above all determines whether the company will be a long term success or not.
5. Understanding the Difference between Price and Value
When you are investing in stocks, you may look at the price and most of the time stop there. Perhaps you will consider the future prospects, read a few analyst reports, look at the current news about the company and then make your decision. However, most of the time you do not know the real value of the shares you are buying for the price you are paying. You may end up buying an excellent company but never make any profits on your shares because you paid more for the shares then they were actually worth.
So how do you assess the value of the shares? You start by reviewing the value of the company. You do this by looking at its assets, profitability and cash flows and figuring out a reasonable multiple to pay. As an entrepreneur you are keenly aware of the value of your own company, and if you have considered buying or selling other businesses, you also know the market conditions. For example, you probably have a better idea of the scrap value of an equipment in the industry compared to even the best analysts on the market. You are spending your own capital, and you wouldn’t buy any company just because someone is hyping it up. You will do your own due diligence and come to a conclusion on how much YOU are willing to pay for the business.
So Why are Most Entrepreneurs Lousy Investors?
The reason is simple. While they are confident and outgoing in running their own businesses, they do not trust themselves with investing. This may be because:
- Investing literature is full of technical terms that intimidate.
- They do not feel they have enough time to tend to their investments, given that entrepreneurship takes up 200% of their time.
- They get used to delegating and start relying on advisors and financial media for investment advice not realizing that they are not as well suited to find good investments as the entrepreneur himself.
If you are an entrepreneur, you have tremendous advantages over the wall street and other investors. You should use your edge and even if you rely on an advisor for advice, do not be afraid to question and follow your gut. You have worked hard for your money and you need to understand that there is no one better to help you take care of it after you have earned it.