Is there an activity with as many unique styles, themes, flavors, and preferences as investing? It does seem like the possibilities and approaches are endless. Fashion might be a good analog…many styles, many possibilities. Or as one of our friends likes to say, “in investing, there are many ways to get to heaven.”
So where do we start? How do we ground ourselves? I like to begin with two foundational questions.
First, what is it for? Meaning what is investing for; what are we actually trying to accomplish with our investing activities? For most individuals, the answer falls into one of three categories:
Reserves. Set aside dollars we might need in the next three-to-five years.
Purchasing Power. For dollars we might need to spend beyond the next five years, we want to increase the likelihood that those dollars can buy more in the future than they do today.
Wealth Creation. For changing future financial flexibility and/or lifestyle.
The second question is who is it for? Meaning what are the hopes, fears, and stories of the individual doing the investing?
The investment industry answers this question with risk profiles designed to understand how much price variation an investor can tolerate without changing their answer to the first question.
But our answer to the question of “who is it for” starts with “it’s for an entrepreneur” since that’s the audience we serve. We’ve found most entrepreneurs are comfortable with asset concentration (one or few assets make up most of the net worth) if they know the asset really well (like the business they founded) or the asset is tangible (like real estate). Otherwise they prefer low risk.
It’s either invest big in what they know; or stay safe. There’s usually not much in between.
So most of our work involves helping the entrepreneur with Reserves (category 1 above) or helping entrepreneurs with assets they already know well (their business(es) and real estate).
But sometimes there are instances where entrepreneurs hold assets that are best suited for category 2 (e.g. retirement accounts). In those cases we design a strategy with lower price volatility and more predictable returns that can modestly outperform inflation. The entrepreneur will be comfortable enough to stick with the strategy during inevitable periods of mediocre performance.
Occasionally, we see situations where the entrepreneur has enough confidence in someone else - a management team for a business or an investment manager for a strategy or fund – that they are willing to outsource the knowledge and risk management work the entrepreneur would do if they were running the business or doing the research themselves.
The entrepreneur makes a shift – from owner-operator to just owner. In our experience, most entrepreneurs FAR prefer to be owner-operator but they are willing to adopt the “owner only” role if they know the people or opportunity really well.
By thinking carefully about what is it for and who is it for we can approach the entrepreneur/investing question in a vastly different way. We can define objectives and be clear about the role the entrepreneur plays and what can be expected. In creating a style for each client, we create a foundation that’s built to last.