As an entrepreneur, your personal finances can oftentimes affect your ability to invest and grow your venture, especially if new growth opportunities are capital intensive. Similarly, if you’ve recently sold your business or startup for a sizable amount and decide you want to invest the proceeds, it is critical that you follow certain basic investment philosophies to protect your newfound wealth. Since the stock market is usually either the source or destination for these funds, we’ve developed a guide on how to invest in stocks with tips for beginners.
Investing as an Entrepreneur
As a successful entrepreneur or business owner, it can be difficult to hear that you can’t just simply start investing and be successful. After all, you did just build a multi-million dollar business, implement a series of best business practices, maintain or grow profitably during one of the most challenging business environments in recent history, and ultimately sell the enterprise. But as you probably already know, the stock market can wipe out 10% or more of your wealth overnight, and in some extreme cases, such as stock option investing or forex trading, completely rob you of all your money in one bad trade.
Whether you are saving money and growing your investments to buy a business, expanding and growing your existing business, or investing the proceeds of a sale, here are 9 rules of investing to live by.
1. Bulls and Bears Grow Their Wealth. Sheep Are Slaughtered.
When investing in stocks, you will be in the company of many professional traders who have already been in the “game” for many years—and, when you are in this arena, it is every investor for himself.
With that in mind, you will need to complete in-depth research to maximize gains, minimize risk, and know when to get in and out of the market or a specific investment. Sometimes keeping things simple and sticking with the fundamentals will provide you with the greatest returns. Often, it is not necessary to pour over complicated charts and graphs in order to earn the most, but rather choose undervalued investments you can buy with conviction.
2. Don’t get greedy.
There may also be times when an investor will hold on to a stock just so they don’t have to pay the taxes on the gains. Paying taxes because you’ve earned a capital gain is bittersweet because, ultimately, you made money. Sell if you’re ahead and pay the tax. Otherwise, you run the risk of holding on too long and ending up with a share price that may eventually go down.
3. Look for value versus cheap.
As Warren Buffett said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” As it relates to the stock market, it is important for investors to buy broken stocks, not broken companies with broken business models. And a “broken stock” means there is a mismatch between intrinsic value and the value suggested by the share price.
Nevertheless, this feat of buying an undervalued company and waiting for the rest of the market to recognize the company’s true value can test an investor’s resolve. The stock market is influenced by fundamentals, but also sentiment, investor behavior, charts, money flow, and other factors.
4. Do your research, know what you are buying, and stick with quality.
When looking for shares to purchase, be sure that you do all of the proper research—and when you do make a decision, always buy quality. For example, the best companies will usually have excellent management, the top talent, a focus on long-term growth, sustainable business models, and a strong competitive advantage in the marketplace.
5. Don’t be afraid to sit on the sidelines until the time is right.
While you may be anxious to get your capital working for you, don’t be afraid to hold steady on the sidelines until the right opportunity comes along. This can mean hanging on to cash for a while. It is often better to wait and get a clear view of the market than to regret investing in the wrong “opportunity” or at the wrong. Remember, preservation of cash and wealth outweighs chasing risky returns.
6. Always have some emergency funds on hand.
Regardless of how long you’ve been investing, it is always a good idea to have an emergency fund. This means liquid funds in case of a financial emergency such as a job loss, uninsured medical situation, or other event that requires a sizable amount of money. Without this emergency fund, you could be forced to sell your investments at a discount in order to access the cash you need.
Similarly, boom and bust cycles have been a regular occurrence for the US economy and stock market. Being fully invested when a sudden downturn hits means you may not have the cash available to make savvy bargain investments that could diversify your risk, lower your cost basis, and help you squeak out a gain faster.
7. Invest without emotion.
Just as you ran your business—based on facts, analytics, and metrics—it is critical that investors control their emotions and invest using logic. Although it is often easier said than done, you must absolutely leave emotions out of your investment decisions. This includes both positive and negative feelings. Making investments based on fear, panic, or hope can cause you to lose your portfolio. If you have a history of making financial decisions based on your feelings or other non-factual criteria, you may want to seriously consider taking a passive approach to investing.
For instance, nowadays, robo-advisors are automated wealth managers. By answering a few personal financial questions such as your age, income, risk tolerance, and retirement needs, these algorithm-based virtual advisors provide an investment plan comprised of multiple low-cost mutual funds and ETFs. The goal is to offer professional wealth management services to the masses at a fraction of the cost of a human advisor. Investors who would rather take this route will want to check out a Betterment vs Wealthfront vs Vanguard comparison to find the best platform and broker for their needs.
8. Don’t get caught up in the media hype.
Getting caught up in the media hype can also be dangerous to your market returns. Oftentimes, Wall Street advisors and analysts will have a vested interest in various stocks and will therefore promote companies in order to boost their gains. Unfortunately, when investing based on this “advice” alone, it is usually too late—and the only ones who will profit are the investors already in the stock.
A much better approach is to have a plan that works for you, and then stick with it—regardless of the next “hot tip.” There will always be “once in a lifetime opportunities” being hyped. But often, it is actually the slow and steady who win the race.
9. Know what is and isn’t a true investment.
When just starting out in the world of planning your finances, it is also wise to have a good understanding of what is—and what is not—a true investment. This is because there are some financial advisors that will tout various vehicles such as universal or whole life insurance as “investments.”
While you can certainly build up a sizable amount of cash value in certain types of policies, life insurance is not an investment. Instead, purchase an affordable term life policy that offers death benefit protection, without any cash value build up, and invest the difference in your premiums to build up a retirement portfolio.
The Bottom Line
The stock market may be touted as the easiest way to get rich, grow your wealth, or save for retirement, but few advisors will ever remind you it is also the easiest way to lose money. Regardless of your eventual goal – whether it is to save money for a down payment on a business, strengthen your financial position to further invest in your current business, or invest the proceeds of a recent exit – these basic investment philosophies will guide you to making good financial decisions in the stock market.
Just remember, when in doubt, park your cash in a risk-free investment such as a Treasury bill and take your time figuring out your next move. Sometimes inaction can be better than the wrong action.
Author: Gary Dekmezian is a former financial professional turned internet entrepreneur who enjoys helping others start saving and investing for early retirement.