I have always owned more than one business and have been a minority investor in other privately held companies. My experience is that even if you know how to make money as a business owner, you will still need to do a better job managing the money you have made.
Here’s the problem. When investing in publicly traded companies, I assume someone else knows more than I do about them. Therefore, my success — or lack of success with these kinds of investments — is more due to luck than anything else. And if things aren’t going well, I cannot influence the outcome. I wouldn’t say I like that feeling.
On the other hand, I have money and time invested in my own business or businesses better than anyone else. As a bootstrapper and someone who has built companies with either my cash or borrowed money as opposed to outside equity investors, my historical return on invested capital is much higher than any other investment I could make. This approach ignores the risk present in a complete lack of diversification. It can get you into trouble.
While it is not my nature to look in the rearview mirror, the truth is, at the ripe old age of 65 and now with my Medicare card, I have learned some things that I would do differently if I could do it all over again. Here are a few of them:
- If you sell a business, take some of the proceeds and put them into something that is low risk and that you promise yourself you will never touch, barring any unforeseen disaster. That is the “nest egg.” Protect that as if it may be the last money you will ever have. I never did that. I tend to redeploy that capital into other privately held ventures with inherently higher risk (and returns).
- Invest in rental properties early in your life. The sooner you can start accumulating cash-flowing rental properties where your tenants pay off your mortgages over time, the better. On top of that, the more investment properties you have, the less taxes you will be paying on the
rest of your income, thanks to depreciation. Income-generating real estate (and I am not talking about raw land) is only sometimes a good short-term investment. But it usually pays off big if you have a 15-year-plus time horizon. Buy, lease out and hold. And avoid the temptation to refinance and suck the equity out of these properties to make other investments. That can get you in hot water.
- Get some qualified help. I can admit that I have always been suspicious of wealth managers and financial advisers. But the truth is, good ones can benefit you in managing risk and watching over your financial health, much like a good family doctor or general practitioner watches over your physical health. The important thing is to find someone you trust. Knowing them well, how they live, and how they manage their money is crucial to finding someone you can work with over the long haul. Ask around. Beware of anyone who promises returns that your better judgment tells you will be unlikely. Only some of these people are competent and trustworthy. Reputation and experience are everything here.
- Get good legal advice. Lawyers are specialized. Find someone who understands what the best legal forms of organization are to hold your investments and who understands wills, trusts and estate planning. The right attorneys are going to be incredibly helpful to you.
While this advice may seem irrelevant to you, if you are a classic entrepreneur, small business owner and investor like me, you should have noticed these things sooner rather than later. Don’t pay a price you don’t need to pay. Be smart — not just about making money, but in keeping it.
Mark Zweig is the founder of two Fayetteville-based Inc. 500/5000 companies. He is also entrepreneur-in-residence in the Sam M. Walton College of Business at the University of Arkansas and author of the award-winning book, “Confessions of an Entrepreneur.” The opinions expressed are those of the author.