Why Good Entrepreneurs Make Bad Investors

Investing is complicated for everybody, but does anyone bring more baggage to the task than an entrepreneur? Here's how to overcome the personal finance challenges that no business owner can avoid.

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The Company Owner's Guide to Money

David Lewis knows better. He knows that a well-balanced investment portfolio is a thing of beauty today and a bulwark in one's later years. He appreciates the quiet stability of municipal bonds, the promise of growth in a choice equity position. He isn't panicked by accounting scandals, crooked corporate bosses, or the nasty bear market. He has seen many a down cycle and understands that being diversified and having a level head is the way to get through them. David Lewis knows all that, and yet somehow he doesn't apply the knowledge to himself. He would still rather take the money that his business generates and plow most of it right back into the business. "It's a gigantic bet I'm making," says Lewis, 54, "that by the time I get to retirement age, I can make the business worth more than I would be able to earn in the market."

Lewis is like a lot of entrepreneurs, except for one thing: he happens to be a financial planner. The business he's building -- 17-year-old Resource Advisory Services Inc., in Knoxville, Tenn. -- makes money by helping its customers act on the very precepts that Lewis has put on hold for himself. One of the nation's 1,000 or so fee-only planners, Lewis prides himself on offering financial advice at its most objective, with prudence and diversification as cardinal principles and with risks soberly calculated and hedged. But when it comes to his own money, the entrepreneur in him somehow trumps the planner. His securities holdings are minimal. The narrative of his net worth would describe his company's slow path to breakeven, then a plateau of prosperity that has failed to satisfy his restlessness, and finally his plans for the future: more associates in his business, the new offices he'll move into this month, and his hope of a major payday when he eventually sells a much bigger firm to his employees. "I could cut back to 25 or 30 of the best clients, work with them myself, and live very comfortably," he says. "But just when my life starts to get comfortable, I reach out and commit to something else."

Most people have complicated feelings about investing. But does anyone bring more baggage to the task than an entrepreneur? There is, first of all, the choice that Lewis's situation exemplifies: between building up his core asset -- his business -- and his investment portfolio. And once entrepreneurs do start investing outside their businesses, well, the issues multiply. Following the time-honored principle that you should invest in what you know, many business owners like to invest within their own industries -- even though the positions they build, taken together with their own companies, usually amount to a risky overconcentration. Others find that the traits that help them succeed as entrepreneurs -- a soaring optimism, a high tolerance for risk -- can handicap them in investing, where hardheaded realists tend to be rewarded. "These are people who believe in ideas," says Michelle Bain, owner of Home Instead Inc., a senior-care service based in Omaha. "They believe in exponential growth, and they're willing to bet on it."

Finally, and most fundamentally, there is the difficulty many entrepreneurs have with the personal goal setting that is a precondition for good investment decisions. "Entrepreneurs tend to have visions for their companies but not necessarily for themselves," observes Mike Maddock, cofounder of Maddock Douglas Inc., an Elmhurst, Ill., marketing-communications firm. If business owners do have both visions, they often turn out to be tangled, with the personal goals subordinated to the business objectives. Choosing when and how to take money out of a business and put it to work elsewhere, for example, is a function of (among other things) how big you hope to grow the company, whether you mean to sell or bequeath it, and what your vision of retirement is. Before you know it, you're mulling not just capital needs and investment returns but also your relationship with your spouse and children. In the end, personal financial decisions are complicated -- for everyone, but especially for entrepreneurs -- because they are about so much more than money. "We think we're talking about spreadsheets," says financial planner George Kinder, "when really we're talking about people's dreams."

But here's the rub: hardly anybody achieves the dreams without using the spreadsheets. The task, like it or not, is to translate your aspirations into decisions about stocks, bonds, real estate, and your company -- without being betrayed by your blind spots or tripping over the complexities that are part of nearly every entrepreneur's financial life.

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