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Friday, March 28, 2014

Entrepreneurs beware of DIY Investing!

I have  people who ask me this question. They think that because i started a business, sold it and because i make private investments that there is something special or unique about how i invest my assets. Let me be the first to say that the traits required to be a good investor are very different from those that entrepreneurs have. And i think i am still learning from the market and about myself all the time.

By default, entrepreneurs are high risk takers who control the risk by knowing everything there is to know about their business and industry. We deep dive into every aspect of our work so that we are able to control risk and maximize our returns. Even when our business has grown a lot, we continue to invest more into it and take further risk by going overseas or into adjacent markets. Frequently, the company we own is most of our net worth.

Furthermore, Entrepreneurs are also highly passionate people and you will hear many successful ones who advocate a combination of gut and metrics to make major decisions.

Good investors on the other hand, diversify. They minimize risk by not concentrating in one area and by proper portfolio allocation. And it is also humanly impossible for them to know with any depth any particular industry which they are invested in. They frequently outsource and use professional managers to help manage their money. Decisions are made based on numerical allocations and frequently a fixed methodology for deciding when to buy or sell. Investors who employ their gut tend not to do well. 

My personal experience is that the above descriptions are totally true and one can lose a fair sum of money if one does not understand the very different traits required. I lost close S$100K or 100% of portfolio during the 2000 dot com crash because i had over-concentrated my positions in technology stocks. Then more recently in 2010, i experimented with options without clear knowledge of how volatile they can be and lost another S$100K on these simply because i could not cut my losses and applied the dogged perseverance entrepreneurship trait to options!

From the above lessons, i learned that it is best for me and perhaps for entrepreneurs like me to stick to passive portfolio decisions and outsource the active selection decisions to good fund managers. 

What this means is that we should make the decision on how much to keep in cash, how much to invest in stocks, fixed income and properties. But when it comes to the actual stock or fixed income picks, either buy ETFs which mirror the market or buy a few different mutual funds. Use dollar cost averaging strategies if we get more cash and rebalance the portfolio periodically every 3 to 6 months. 

If the urge to take risk or to make decisions is too strong and if we have an interest in trading, then set aside a small percentage of assets - say 5% to make speculative trades on equities, options or bonds. The above philosophy has worked well for me and i hope it will work readers too. 

2 comments:

  1. Hi,

    It is interesting to hear from someone who has been a successful entrepreneur and have some experience as a DIY investor on the differences between entrepreneurship and investing. I am a DIY investor, not an entrepreneur although I have some experiences working with entrepreneurs.

    Experienced investors tend to be pessimistic because they think about losing money before they put in money. Risks considerations before profits. Even if they invest, they structure their investments in such a way to minimize losses when things go wrong. As you already know, this is called diversification. Entrepreneurs have got to be optimists by nature. Otherwise, they will never get started given the high odds of failure.

    Your post talks about the problems entrepreneurs have when they try their hand on DIY investing. On the other hand, DIY investors also have their problems when they try to transit to entrepreneurship. Rational investors risk their money only when the odds are on their side. Given that most start-ups fail, how could anyone with a rational investor mind-set even get started as an entrepreneur? Given the statistics of start-up failure, it is irrational to start a business if the goal is to make money since the odds are dead set against the risk-takers. It is virtually impossible for a successful DIY investor who is able to generate a comfortable cashflow from his investments to transit to become an entrepreneur because it simply does not make financial sense if his sole objective is to make money. I see successful entrepreneurs as very smart and yet, crazy people. They are surely smart enough to know the odds, so they have got to be crazy thinking they can beat the odds. As an investor, I pay tribute to all the "crazy" entrepreneurs out there. Without the irrational optimistic entrepreneurs, there will be no companies for rational pessimistic investors to invest in.

    Good investors have a better track record of knowing when to fold and getting out before the hurt deepens. I do not think it is because investors have a more astute sense of timing than entrepreneurs. It is simply because it is easier to cut loss as an investor compared to an entrepreneur. Investors deal mainly with money and stock symbols. If the company makes disappointing earnings and the price plunges, the investor sells and removes the company from his portfolio. Sell first and ask questions later. If it is discovered to be a mistake later, have the discipline to buy back. Never mind if it is going to be at a higher price. On the other hand, entrepreneurs deal with people who must be treated with respect. If an employee makes a mistake, should an entrepreneur fire him immediately without giving him a second chance? Putting aside the human indecency of firing people at will, the entrepreneur does not have the luxury to hire the fired employee back if he learns that he made a mistake later. The indignant sacked employee will fire back "F**k you" and will probably not give the employer a good time should he one day become somebody. A decent entrepreneur has obligations to his employees, customers, suppliers to be persevering and not give up too easily to avoid leaving his "dependents" in the lurch. The investor is trained not to be married to his stocks. When in doubt, sell. No need to get emotionally attached. In fact, the investor who gets emotionally attached is at a disadvantage compared to those who are not. I guess the job of the angel investor is much harder than public stock investors because they get to know the people at the company on a personal level and it is harder to exit.

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  2. You mentioned about losing money as a DIY investor. I guess not shaking off the habit of dogged perseverence that served you so well as an entrepreneur harmed you at that time. Yet, I think it was a good thing. Had you been successful as an investor, Singapore would have lost one more successful entrepreneur. I would rather see more fellow Singaporeans becoming successful entrepreneurs than successful investors.

    Money aside, I believe the emotional satisfaction for successful entrepreneurs are much higher than successful investors. Successful investors will see the money rolling in into their bank account and that's that. The buck stops there and I do not see much additional social benefit beyond. On the other hand, successful entrepreneurs create jobs (hopefully high-quality ones) for their employees, new products/services for customers who buy because these stuff add value to their lives, revenue for their suppliers which in turn sustain and create jobs in the suppliers' companies. In the midst of creating so much social good, entrepreneurs make lots of money for themselves. For entrepreneurs, the joy of seeing people happy with their creation can never be enough. For investors, you can make enough money to the point that the rolling number in the bank account generate little additional satisfaction. Once a person has enough money to cover his annual expense 20 times over, I do not think he will get too excited even if he gets to earn another year worth of expense. If I had a choice, I would rather be a successful entrepreneur than a successful investor.

    I wish you every success as an angel investor. I believe Singapore needs more start-ups who will grow to become indigenous big companies that provide high-quality jobs to fellow Singaporeans. High-end, high-value jobs will always be done at home. We cannot expect foreign MNCs to create high-value jobs here because those jobs are reserved for their own people. Since Singapore has reached developed country status, it is time for us to create our own companies. All the best to you!! I hope you fund several successful start-ups which will grow into big socially useful Singaporean companies over time and get gloriously rich as a result.

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