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Morningstar founder Joe Mansueto on investing, money, and the company-building life.

Joe Mansueto is founder, CEO, and majority stockholder of Morningstar Inc., a Chicago-based financial-research company best known for its "star" rating system for mutual funds. For the past few years, Morningstar has also offered stock-analysis services.

Mansueto launched Morningstar in 1984 with an investment of $250,000 and a single product -- a quarterly fund-analysis publication. The company has grown to more than $90 million in annual revenues and 800 employees worldwide. It is still private and in a 1999 private-equity sale was valued at $450 million. Mansueto holds an estimated 70% of the stock, worth about $315 million on paper at the time of that deal.

Inc contributor Michael Warshaw spoke with Mansueto about how he thinks about money and investing after 17 years of the company-building life.

Inc: Should entrepreneurs sink everything into the companies they start?

Mansueto: I know I certainly did. When I started Morningstar, I had already worked for a few years in a company of my own and in the mutual-fund industry. I put in all the capital I had, which was $250,000. I started with one publication, Mutual Fund Sourcebook. When I wanted to launch another publication several years later, I borrowed $250,000 from my family.

I didn't enjoy borrowing the money, and it was a good feeling to pay it back. It's funny -- the total start-up capital of $500,000 seemed like a lot at the time, but it's really pretty small compared with what we invest in new products today.

All the capital I put in -- except for $1,000 -- was structured as a loan from me to the company. I think a lot of entrepreneurs use that type of capital structure. If your start-up capital is classified as equity, you get hit with capital-gains taxes when you take money out. The company has since paid me back, and I've paid my family back.

Inc: So do you advise founders today to put everything into their businesses?

Mansueto: I think it completely depends on your risk tolerance.

Inc: What exactly is the downside of sinking it all into the company?

Mansueto: You end up with a really disproportionate part of your wealth in one illiquid asset. You're like a farmer who's land-rich and cash-poor. It's staggering in terms of the lack of diversity. On the other hand, you do have more control over how well the asset does when it's your own company. So that provides some comfort.

To diversify your holdings, you have two choices. You can reduce the size of that large illiquid investment by selling pieces of it to other investors over time, or you can build up your assets outside the company.

Inc: How did you do it?

Mansueto: I built up the assets that I had outside Morningstar. It took a while before I took any money out of the company. I never took a salary until probably the early 1990s, and even then it was modest. I always thought my main remuneration from Morningstar was my ownership, and it still represents over 90% of my wealth.

I do have other investments. I love to invest, and I've built a stock portfolio that is my biggest asset outside of Morningstar.

Even in the early years I wanted to have some liquidity, since Morningstar was so illiquid. I started an IRA back in the early 1980s that has grown into a significant asset. I have a small 401(k) portfolio as well, and a portfolio outside of that.

I'm a big fan of Warren Buffett and, like him, a value-oriented investor. Building a stock portfolio is slow going at first. But over time, if you compound your assets at a high rate, the curve is exponential. So now my outside investments have become a significant asset for me.

Inc: But the way you describe it, leaving so much of your worth embedded in your company is still risky.

Mansueto: Oh, I have a very lopsided portfolio, but I feel good about Morningstar and the prospects for it. I also feel I've built up enough assets outside the company to give me security. Even in my worst-case scenario, my family has more than we would ever need.

One reason for that is that I don't have huge capital needs. I'm not a big spender, nor is my wife. Spending beyond your means is where it gets risky.

I've always lived within my means. I lived in a one-bedroom apartment until three years ago, when I got married. Not that I've taken an oath of poverty -- it was a nice apartment -- but I never owned any real estate. Then, when we got married, I bought a condominium in Chicago. I bought my first new car. And we recently bought a vacation home, a condominium down in Florida. So as I've gotten older and built up more assets, my spending has gone up.

You also need to keep your investment in your company secure. You do that by not going crazy allocating capital to silly projects or using crazy amounts of debt. Morningstar has $45 million in the bank and no debt. That gives me security with my biggest asset.

Inc: Do you recommend your approach for other company founders?

Mansueto: I think it's a very individual decision. My views are fairly extreme. Take, for example, my decision not to sell any of my company shares. A more mainstream view would be to diversify by taking a little money off the table. Sell some shares, either to an outside investor or to employees through an employee stock ownership plan. I could diversify more if I wanted to. I have a pretty unbalanced portfolio.

Look at Bill Gates. He sells 1% of his Microsoft holdings every quarter -- just a little bit to achieve over time a more diversified portfolio. That, I think, is more typical than my approach.

Inc: Is it smarter?

Mansueto: There's a logic to it. From a financial perspective, diversification doesn't lessen your return too much but dramatically lowers your risk. There are tax disadvantages to periodic sales, but probably the overall after-tax return doesn't change significantly. The main thing is that you reduce the risk.

And yet I do something a little different. For me, I think it all boils down to a company more than a financial asset. These are not just shares of IBM I hold and view dispassionately. You have relationships with the people who work here. You've put a lot of time and passion into it. You're proud of the products and what we do for investors. So I don't view my Morningstar shares as strictly a financial asset. I feel like it's a throwback to an earlier time when entrepreneurs built and held businesses instead of the rapid buying and selling that often occurs today.

Inc: What are your investing habits?

Mansueto: I'm an investment junkie. I go online every morning, on Morningstar .com. I walk in the rain to buy Barron's on Saturday. I read annual reports on vacation. You get the picture. I love investing -- it's intellectually challenging trying to understand how a business works and how the various forces in the world affect it.