(February 2007) “There are three kinds of men. The ones that learn by reading. The few who learn by observation. The rest of them have to pee on the electric fence for themselves.” –Will Rogers
I’ve had the good fortune to have met some truly successful business people over the years — both in the public company realm and at the local proprietorship level.
While they have succeeded in different businesses, they have all demonstrated some distinct similarities. One common thread that appears to run through all of them is their persistence and patience. They have made it by refusing to accept defeat in the face of sometimes overwhelming odds. The words, “quit,” “resign,” “give up” and “fail” are not in their vocabulary. Every entrepreneur has been successful has done so, in most instances, by facing those problems and finding ways around them.
(Financial advisors aren’t much different. No doubt every one who has made it has had a prospective client or two slam a door in their face. They have built their business by dismissing the rejections and driving on to the next meeting, the next seminar, the next encounter with a prospect until they got what they wanted — a portfolio of dedicated long-term clients who they serve well and who in turn, appreciate their efforts.)
Unfortunately, this half has lost the connection with reality they have used so effectively all their business life. Gone is the patience and ‘stick-to-itivness’ they have adhered to all their working lives as they have built their own business.
Instead, they have become impatient and demanding. Gone is their gritty persistence and endurance — they want returns now. One year to them has become an eternity. In short, they have joined the majority of investors — the “crowd” of market followers who spend their time mechanically reacting instead of thinking. And it drives professional planners and brokers crazy.
Business smart, investing dumb
Why does this happen to these otherwise intelligent, successful entrepreneurs, the one group you’d expect to observe the stock market in a rational way? Here are a few possible reasons I can offer to explain why this irrational dichotomy takes hold:
• They don’t have their own business valued day-to-day. To paraphrase Warren Buffet, the players have shifted their attention from the game on the field to the score board. Players don’t win games by consistently watching the score. Successful business people have their eyes firmly focused on what’s happening in the game with the occasional glance at the scoreboard. Sure, the tally is important, but it doesn’t deserve to be fixated on as stock market jockeys typically do.
Unlike publicly traded companies, people who possess their own businesses don’t have a ticker tape running across the front of their premises, continuously shouting out the shifting estimate of value. Nor would they likely want such a terribly distracting “scoreboard” present. It would send the wrong picture to employees and customers alike.
• They don’t know what to do with their excess capital! Great business people are masters of running their own business and producing wealth for themselves. This wealth is often in the form of excess cash. Over time, this cash piles up, but the sad truth is many of these same people don’t know what to do with it.
Great businesses don’t need all of this excess capital reinvested back into the operations of the company. It just joyfully mounts on the balance sheet in the category of “Cash and Other Marketable Securities.” Many entrepreneurs know how to create this excess wealth, but don’t know where to begin to deploy it productively and safely.
Truly successful business operators know what to do with the excess wealth created by the company as well as how to run the operations of the business successfully. That’s when they hopefully come to you, the person with expertise in the area of reinvesting all this liquidity in an intelligent way.
• These otherwise intelligent, often brilliant business people are subject to the same pressures from Wall St. and Bay St. to buy and sell. The newspapers and business shows on TV are constantly focused on the “here and now:” what is happening right now with prices and current news with little if any concentrated discussion of the longer term environment.
This flies in the face of how true business owners act and behave. They don’t buy a whole business, run it for three or six months, or even just a year, and then turn around and unload it if they are disappointed with the company’s current results.
• Business newspapers and TV business shows talk a lot about big picture items — what’s happening in the general economy, where are interest rates going, the price trends of everything from stocks to currencies to commodities. All this is extraneous and distracting to operating a business. Trying to grapple with these unanswerable questions regarding buying stocks or mutual funds is opposite to real business practice.
When real business people are focused on their company, they spend most of their time on the micro-economics of their business — are the customers happy, what’s the competition up to, are other companies able to compete successfully to capture some of their business?
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This focus on short-term price activity leads investors, including real successful business people, to sometimes pay prices for stocks and mutual funds that they would never shell out for a whole business they were familiar with.
Put another way: What rational private business owner, including financial advisors, wouldn’t instantly sell their business at the current market multiple of 18 times trailing 12 month earnings? None that I’ve met.
There is no rational explanation except to say that there is little or no logical business-like thinking going on here and these winning entrepreneurs have been swept up in group thinking along with the unwashed masses. It doesn’t have to be this way.
Set them straight
As financial advisors, you are in the best position to jar your clients back to the real world of rational behaviour and thinking.
Get them to keep relating to the behaviour they exhibit in running their business, where their world is dominated by logic and common sense. Link their business and how they regard it with ownership of shares, business by business or through a mutual fund they might own.
The objective is to keep them from going off the rails chasing short term prospect for quick returns. By doing this, you can keep them focused and help them achieve their goal of protecting their wealth they have created in their businesses and growing that excess capital.
One final thought: Are you as a business person running a financial advisory service, practicing these principles yourself? If you are, it will be easier to talk rationally to your wealthy business clients.
I wish you all a successful 2007.
This article first appeared in the January 2007 edition of Advisor’s Edge Report.
Larry Sarbit is president & CEO, Sarbit Asset Management Inc.