Investment Advice for Entrepreneurs

Successful entrepreneurs are usually hard-working, brave, and energetic. These traits serve them well since business success requires dedicated hard-work, risk taking, and boundless energy.

So why are entrepreneurs often good business people but such bad investors? What lessons can we learn from their investing approach? This post suggests the challenges entrepreneurs face when making passive investments and the strategies that can be used for improvement.

Successful Business, Lousy Investment Portfolio

Unfortunately, the same qualities that bring business success to entrepreneurs work against them when managing their investments.

I’ve watched too many wealthy entrepreneurs squander their investment capital because they take biased advice, refuse to follow a plan, and let their ego and emotions get in the way of making good decisions.

This is because the qualities that make successful entrepreneurs and the qualities that make successful investors are opposite:

• Successful Entrepreneurs are hard-working, brave, energetic.
• Successful Investors are lazy, cautious, and patient.

To combat the problems entrepreneurs face when investing, this post will highlight three ways entrepreneurs can improve the performance of their investment portfolio by:

• Considering how to receive advice (and who’s giving it)
• By crafting a plan, and sticking to it
• By finding a better way to spent time (hint, not on investing)

Who’s Advice?

If you’re an entrepreneur who has a bad track record with investing, consider who’s giving you advice. If you’re getting advice from people who benefit from your activity, this conflict of interest sets you up for problems.

For example, a friend of mine sold his business for $25 million. A huge payday for him. And soon enough, the broker who arranged the sale of his business was calling my friend with new ideas.

My friend made some venture capital investments by this broker’s advice. And it turned out, they were all crap. None was profitable. Why? Because this broker’s advice was self serving and biased. The broker didn’t know the entrepreneur’s goals or situation. He was giving advice in a vacuum.

When someone is selling you something and receiving a commission, they have a conflict of interest. If someone stands to benefit from your actions, beware of their advice.

The same is true when someone recommends you join an investment in a company they are already invested in. Counterintuitively, when someone has made a bad investment, they tend to recommend it to others. Doing so is driven by the disposition effect which is part of an identified psychological bias called “loss aversion”.

To support our own ego, we often “double down” on our losses and promote these decisions to others rather than admit we were wrong. Therefore, investors promote bad investments they’ve already made.

To avoid taking bad advice, craft your team of advisors thoughtfully.

The first step is considering how your advisors are compensated. Anyone getting paid a commission if you take their advice is biased.

Next, avoid investments recommended by anyone already invested. Anyone who promotes an investment they’ve already made is biased too. Don’t be the “greater fool”.

Your team of advisors should include people who have no conflicts of interest.

Someone giving you investment advice should have no stake in the outcome. They should either be compensated by the time it takes them to form an opinion and provide it to you or they should be a friend or family member who clearly has your best interests at heart.

Here are examples of people you should take investment advice from:

• Your accountant (pay them a fee for tax advice related to your investments)
• Your lawyer (pay them a fee for legal advice related to your investments)
• Your family office (don’t pay them commission for their advice, pay them a flat fee for services provided)
• Other investors like yourself (who don’t receive any compensation for their advice and who are not already involved in the investment they are recommending)
• A Fee based investment advisor without any embedded commissions (this way they are agnostic towards which investments you might make)
• Your spouse (who will often dump cold water on your investment ideas, which is good since the spouses of most entrepreneurs frequently have opposite personality types)

Who’s Plan?

Whether an investor is taking advice from bias promoters, or trading stock too often. Grounding decisions in a plan will support better outcomes.

An Investment Policy will anchor decisions in a consistent decision-making process. This will help investors put their decisions into perspective and enable evaluation based on a benchmark.

An Investment Policy is a plan outlining an investor’s goals, methods, and evaluation criteria.

Having a written Investment Policy points a portfolio towards measurable results instead of what “might be”.

For example, an entrepreneurial friend of mine got excited about a medical device company that recently went public after reading an article online. The shares of this company were also touted by a colleague of his. However, my friend’s portfolio is focused on dividend paying “blue chip” stocks since these types of investments will allow him to meet his financial goals.

We looked at this medical device company together and noticed it has a short track record, doesn’t make profits, and is otherwise highly speculative. I recommended my friend avoid investing in this new medical device company and consider a larger dividend paying profitable company in the same sector instead.

My friend decided based on his own judgment. This is dangerous because our decisions are clouded by our emotions.

But, if my friend used a written Investment Policy to guide his decisions, it would have clearly detailed the criteria used to evaluate new investments. If an investment does not meet a pre-determined set of criteria, the idea of whether to invest or not can be easily determined using an Investment Policy. No need to make “judgment calls”.

A written Investment Policy allows investors to deflect bad investment advice and our own emotions because the course of action taken will be rooted in a pre-determined set of goals and a clear decision-making process.

A good Investment Policy will help investors screen out unsuitable investments in favour of those aligned with their goals.

Focus Your Energy

Rather than waste time actively managing an investment portfolio, wealthy entrepreneurs should find a better use for their time. We have mountains of data showing how active investment management fails to outperform passive indexing. Entrepreneurs should therefore ask themselves: instead of investing, can my time be spent on more productive activities?

If you’re spending any time thinking about your stock portfolio, its probably too much.

Rely on a buy-and-hold approach to stock market investing and review the results periodically. A review each quarter is more than enough.

And, when investments are reviewed, compare results to what an Investment Policy says. Does your portfolio reflect your goals?

Personally, I have a hard time sitting still too. As an entrepreneur myself, I’m constantly tempted to make trades in my investment accounts based on each day’s headlines.

But over the years, I’ve taught myself to avoid active trading because active trading drags down my performance. One way I get the desire to trade “out of my system” is to invest on a schedule. I don’t make “off the cuff” decisions anymore. I limit my transactions to a pre-determined time slot and make them based on a pre-determined set of criteria instead.

I schedule a weekly task when I can review my investments and allow myself to make one new purchase at this pre-determined time each week. This way, I can still feel some agency over my portfolio’s results without being tempted to “buy-and-sell” anytime I feel like it.

The time each week when I can make a new purchase uses up my desire to “tinker”.

Our Family Office

One of the biggest challenges investors face is battling our own psychology. Emotions cloud our decisions and cause us to make errors. These errors compound over time and contributes to long-term underperformance. Our family office works hard at focusing our client’s time & energy towards activities with clear benefits. We don’t sell our clients any investment products. But we do support decision-making methods that bring consistency, clarity, and peace of mind.