With the recent falling markets and a new panic in the air, it’s an opportune time to reflect on the current state of the stock markets in general and, moreover, add some perspective on how entrepreneurs should invest their profits.
In his book, Money: Master the Game, Tony Robbins references what is probably one of the best analogies I’ve heard (or read) in the last many years.
He equates the stock market gyrations to the 4 seasons: spring, summer, fall, and winter.
If you look at the trends of the stock market for the last hundred years, it follows a fairly consistent up and down pattern, and just as sure as we are that winter follows fall, it’s as certain that the stock market’s peaks (summer) will always be followed by fall and then winter.
It’s never a question of if the market will fall, it’s always a question of when.
In the same vein, the economy works in similar patterns.
Employment is at all time lows, which in turn leads to capacity and production constraints, and then inflation. The Fed (in the US), or Bank of Canada, raises interest rates to keep the overheated economy in check, which leads to less borrowing and investment in plants, R&D, and business investment. That, then, leads to higher unemployment, which in turn forces the Fed to lower interest rates to spur the economy, which starts the cycle all over again.
It’s never a question of whether a recession will happen. It’s always a question of when.
So what is the typical entrepreneur to do?
My thoughts are rather unconventional.
Don’t invest in the stock market. Period.
There. Now you don’t have to worry about the ups and downs of the stock market. Problem solved, right?
As an entrepreneur, your investment and cash requirements are different from the regular investor’s, as you already have a large percentage of your wealth tied up in your business, which is equity.
A downturn in the market will result in a downturn not only in your stock portfolio, but if the economy enters a recession, there’s a good chance your business will be in need of extra cash.
Let me illustrate with a story. (It is found in my book. You can click this link for a free download.)
Enter John Anderson
“John Anderson” (not his real name) built a successful appliance retail operation from a one-man shop to an $8 million business, with eight stores and 50 employees, in just 15 years. Unfortunately, John was so busy building his empire that he spent little time contemplating how he should invest his profits, which in 2006 alone amounted to $800,000 before taxes. John was always of the opinion that his best investment was his own business, so he spent every possible minute managing and building his company. He invested his accumulated $3 million into a holding company with the bulk of his assets sitting in a conventional 70% stocks, 30% bond allocation. John maintained this percentage allocation for years.
Then the 2007 recession and financial crisis hit, and John’s revenues declined from $8 million to $5 million within one year. His $2.1 million stock portfolio also suffered a dramatic fall of 40%, leaving him with just over $1.25 million in stocks and $900,000 in bond funds.
The once profitable business now faced a $300,000 shortfall, and John realized he needed to sell some of his portfolio to cover those losses (little did he know that he’d experience a loss of $150,000 in the subsequent year as well). Luckily John still had some investments, and his business would later turn around.
While John had thought he was properly diversified with a 70% stock, 30% bond allocation, he was in fact much more exposed to the equity markets than he had ever considered. He was fortunate enough to have a somewhat liquid portfolio that, although not ideal, could be liquidated for cash, but otherwise his business could have gone under.
John Anderson is your typical entrepreneur: he has a risk-oriented personality and likes to invest in more aggressive ideas. Unfortunately, in John’s case, he didn’t have a good sense of what he was doing. Instead, he was always game to try the “next big thing” as recommended by a friend or his brother-in-law financial advisor. Instead, what he needed was an easy-to-stick-to investment strategy and an asset allocation approach tailored to entrepreneurs.
Enter the Financial Advisor
I don’t think I’ve met a financial advisor yet that really understands how entrepreneurs think, or how we need to invest.
Our business is our largest asset.
If your business is worth $1 million (for example), and you have a cash portfolio of $1 million to invest, dividing your cash portfolio into a 30% bond and 70% equity allocation will leave you way too exposed in the next recession.
Imagine your once otherwise healthy and profitable business is now not doing as well. You need cash. You’re now forced to liquidate your bond and/or equity portfolio at a significant loss to sustain your business.
So what do you do?
Enter Warren Buffet
Buffett has an expression, “Be fearful when others are greedy, and be greedy when others are fearful.”
When the next recession happens—and remember, just like winter, it will be here—you need to be ready to invest.
That’s why you need cash.
You need cash to:
– Invest to expand your own business. That’s where you will get your best ROI.
– Get ready for opportunities to present themselves. For example, your competitor has gone bankrupt, or the beautiful piece of investment real estate that was selling for $2 million is now on sale for $1 million.
Your cash is your war chest.
If you’ve been running a successful business for the last few years, and you’ve managed to accumulate some extra reserves, now’s the time to convert bonds and stocks to cash, hang-tight, and get ready for opportunities to start presenting themselves.
I’m certainly not a market prognosticator, and I have no idea if the stock market will rebound this time or not in the next few months, or if the economy will remain strong for another six months, year, or two years, but what I do know is that your buying opportunity will arrive. And when it does, you need to be ready.
In the meantime, if you have cash, reinvest into your business, keep your reserves ready, and get ready for what will become one of the best buying opportunities we’ve seen in the last 10 years.
Next, if you’re wondering how to invest those buying opportunities, I review my suggested asset allocation strategy in my book, which you can download for free here: The Kickass Entrepreneur’s Guide to Investing.
In the book, I review the three primary buckets and how to invest your business’s profits to maximize growth of your overall portfolio, have cash-on-hand and ready to deploy, and how to take advantage of investment real estate.
I’m not hoping for the next recession, but I am ready. You should be too.
Don’t panic when it arrives. Look at it as an opportunity.
By the way, is your business’s revenue or profits stagnant? I can work with you on a consulting basis to help you get your business and wealth to the next level. Schedule a free 30-minute phone consultation with me here.
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