The financial bruising that the CEOs of many technology companies suffered illustrates a risk that every investment expert warns about but that many entrepreneurs blissfully embrace: becoming overconcentrated in a single industry. Betting on the stocks of your suppliers, customers, or associates is tempting; after all, don't market gurus like Peter Lynch tell you to invest in what you know? What's more, there are plenty of business owners whose deep knowledge of telecom or retail or financial services has helped them to identify and invest in good companies. Hey, some of them were even alert enough to sell before bad things happened to those good companies.
But you'd be foolish to try to emulate them. Diversification is the first commandment of investing. Most of your wealth is tied up in whatever industry your company is in; don't put the rest of your nest eggs in that very same basket. It's simple: if your own company's fortunes are tied to, say, those of the auto industry, you want Pfizer, not Ford, in your personal portfolio.
Problem: You're drawn to innovative concepts that could pay off in a big way.
What to do: Avoid trailblazing companies -- as investments anyway.
Surprising side effect: New respect for municipal bonds.
Of course, technology entrepreneurs weren't the only business owners burned in the Nasdaq debacle. Home Instead owner Michelle Bain dabbled in tech stocks, too, as did many other people in her social and business circles. "Tech stocks were all anybody talked about," she says. "At happy hours, after church -- whenever."
No surprise there: having an eye for trends and a nose for opportunities is one big reason that business owners have money to invest in the first place. But the same traits can make you especially vulnerable to the fallacy that a company that's helping to change the way the world works is likely to be a good investment. As early shareholders in railroads, airlines, and Internet companies proved, it ain't necessarily so.
Anyway, since you're already heavily invested in one trailblazing company (your own), you really don't want much exposure to others. Diversification is a many splendored thing. One successful business owner might figure he's facing all the risk he cares to in his own company; he's the guy who will pay cash for a new home and maintain a portfolio consisting mainly of ultrasafe municipal bonds. Another will get fancier: since his is a small-cap company doing business entirely in the United States, he wants some large-cap foreign stocks in his portfolio. How you spread your own risks will depend on your own circumstances and interests -- but spread them you must.
And when it comes to betting on great ideas, take a lesson from the angels. These investors in early-stage companies -- usually seasoned entrepreneurs who have started and sold a company or two of their own -- are fascinated by the search for the next big thing. But as San Diego-based Bill Payne, 61, a leader of the Tech Coast Angels group, explains, he and most of his angel colleagues are working strictly with their "go to Vegas" money, which represents only 5% to 10% of their net worth.
Problem: You're convinced that there's not much you can't do, once you put your mind to it.
What to do: When it comes to investing, delegate. But don't abdicate.
Surprising side effect: A better big-picture view of the economy.
Entrepreneurs have to be generalists, willing to tackle nearly any job. For some, investing is just another item on a lengthy to-do list, to be approached with the same brisk confidence they bring to other tasks. That can lead to problems, as specialists in behavioral finance (a new field in economics devoted to studying why investors often behave irrationally) have shown. The trouble is that most investors -- business owners included -- routinely overestimate their knowledge and abilities.
That's another example of how a trait that helps you build a business can hamper you as an investor. Consider the case of Rob Chewning, 33. Chewning started his company, Southern Woods, in an Atlanta suburb six years ago by going around to contractors and asking what they needed help with. "Floors" was the most interesting answer. So Chewning, a Georgia State University business major, learned about hardwood floors and built a thriving business that has since expanded into carpeting and interior decorating. When he was making enough money to start putting some aside, he approached investing with his typical can-do attitude and set up an account with an on-line broker. "I was aggressive," he says. "Bought a ton of Cisco and watched it drop by 75%."
Not long afterward Chewning started interviewing financial planners. He settled on Robert Hockett of Cambridge Southern Financial Advisors. The stock market, discouraging though it is right now, is getting a regular monthly investment from Chewning. Over time he will build a diversified portfolio of index funds, with some international exposure as well. There will be a good slug of bonds, too.
But what Chewning is most energized by is a real estate transaction that's a classic for business owners. He's personally financing a 12,000-square-foot building in Barrow County. Southern Woods will be the main tenant, paying him rent on 5,000 square feet. That still leaves him 7,000 square feet to rent out to other tenants, plus his investment in the building's appreciation over time. Eventually, Chewning expects to build a portfolio that's about evenly divided between real estate and securities.
Conclusion? For heaven's sake, delegate. Working with a financial planner, as Chewning has done, is one option, though not the only one. (See "Resources: Where to Start Getting Investment Help," below.) Buying mutual funds, as Mike Maddock does, is a form of delegation as well. The one thing that few business owners have the time to do properly is to be active traders in individual stocks. But delegate doesn't mean abdicate; you'll get the most out of your advisers if you stay abreast of investment ideas.
