Five things to consider when making investment versus business decisions
Andrew Hollingworth, founder of Holland Advisors and Portfolio Manager of the VT Holland Advisors Equity fund, explains why decision-making in running a business isn’t all that different from investing.
How should I invest? I often get asked this question and for many years have watched good business managers not always make wise decisions when it comes to investing. They have a tendency to see the investing world as somehow different, distinct, complex and risky versus the business world they live in day to day. I find this strange, even ironic, as the deeper I have studied the world’s best investors, the more business-like I found them.
Investment is most intelligent when it is most business-like
Benjamin Graham (Warren Buffett's tutor)
As a result of this, business owners who are highly competent in running their own companies might go in search of help when it comes to the perceived complex world of investment. Often, they are disappointed with the outcome. In response I offer a few words of guidance:
1 Invest like you run your business
Likely you will take a long-term perspective in running your business. Do the same when investing. Also, when running your company, you are unlikely to even consider the value of your company every day. Yet many people look at the value of their investments more than once a day. If you can wire yourself not to do this you are starting down the right track.
You are also likely in business to invest in things you understand. Why should investing be any different. I recently wrote a letter to my fund investors on the eve of converting to a UCITS fund (what used to be called a unit trust). In it I observe that while the value of my fund was volatile last year as all markets were, my phone did not ring with concerned investors. Why? Because almost all of them were long term-oriented business people. I thank them for their support and the patient approach they rightly bring to investing.
2 Find company managers or investment managers you know, trust. Then stick with them
If you are not willing to own a stock for 10 years don’t even think about owning it for 10 minutes
Warren Buffett
In the fund I manage, I look for ‘owner manager’ companies ie those where the CEO has a substantial stake in the business. While this alone does not guarantee success, it is a good starting point and importantly, it aligns the interests of investors and managers. This alignment point is not looked at enough in business.
When all a CEO’s eggs are in a single basket he tends to carry that basket rather more carefully than when it contains just a few share options I observe. (For disclosure I and my family own c 20% of the units of the VT Holland Advisors Equity fund.) The phrase I use is that I eat my own cooking.
3 Know your all-in costs
What are you paying a fund manager? Is that worth it for what he or she is doing versus say an index fund? And what are you paying a wealth manager versus what a platform company costs?
US Investors are much more advanced in their understanding of costs.
4 Ignore all tips. Ignore what’s ‘hot’
If you have been running a good engineering company for 25 years and making good margins gradually adding more customers year after year and I offered you an online dating business to buy, you would not give it a second look.
Looking at the latest hot investment sector could be seen in the same vein. You know nothing about it, so pass. However, getting some exposure to new areas of growth like technology or China might be where you might seek specialist help.
5 Trust your instincts, but your analytical reasoning too. If a scheme looks too good to be true, it probably is
Equally if there is a good company, product or investment manager that you know really well and respect you may well have an advantage over others. If you purchase that company’s shares wisely and never sell them you can just let your capital compound.
The last thing I would say about investing is that it can be enjoyable. Importantly not in a casino-like way. That is a mentality that some (sadly many quite young) are succumbing to currently that I fear might end badly for them. Instead, research and occasionally invest in a learning and problem-solving way. Then your capital can hopefully compound and you can get a little wiser on the journey.
I am a better investor because I am a businessman, and I am a better businessman because I am an investor
Warren Buffett
