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Entrepreneurs Must Revel In The Art Of Value Investing

Entrepreneurs Must Revel In The Art Of Value Investing

The Entrepreneur Needs To Start Thinking About His Own Financial Future Very Early In Life

Why is every successful entrepreneur so obsessed about their business? The point is something different. The business becomes successful only when the entrepreneur tends to show an unmatched obsession for the business.

That is the only way businesses grow and thrive. But, what every entrepreneur needs to remember is that there is a world beyond business and that is the world of the entrepreneur’s own financial future. Obviously, an entrepreneur may have spent the best years building the business and may be in a position to take things a little easy. But the entrepreneur needs to be conscious of a few basic things here.

Firstly, unlike a government employee, the entrepreneur does not get any pension after retirement. So the planning has to start early on. Secondly, when you leave your job as an employee you take home a sizable sum as your gratuity and provident fund corpus.

The entrepreneur does not have any of these benefits. That essentially means the entrepreneur needs to start thinking about his own financial future very early in life. What will be the guiding principles when the entrepreneur starts planning a secure and comfortable financial future?

Guiding Principles For An Entrepreneur In Wealth Creation

Broadly, the guiding principles for wealth creation are approximately the same for most people. In case of an entrepreneur, there are some additional dimensions.

Why do we say so?

Firstly, the entrepreneur automatically has a higher risk appetite and the capacity to take calculated risks.

Secondly, the entrepreneur has to hit two birds with one stone. There is a need to manage the flows of current liquidity and solvency and merge it with long-term wealth creation.

Thirdly, he comes with an in-depth understanding of the specific industry he operates plus the sectors that are integrated backward and forward. This gives an added advantage.

Here is a 5-step approach for an entrepreneur to adopt the value investing approach to wealth creation.

First set your goals and work your requirement backwards

The best way to value investing is to work backwards. You first need to figure out what should be your allocation to equities and debt. As an entrepreneur, your investment mix must be such that there is liquidity available for the short term, there is stability in the medium term and there is growth and wealth creation in the long term. It is this delicate mix that will work for you. Unless you do not know where you are headed, it will not matter how fast you run. So first set your goals and work backwards.

Make your money grow aggressively through the power of equities

You need a good chunk of your money to grow passively. Now, when we say passively, there are differently interpretations to it. When there is not much alpha in the market, you can stick to index funds and index ETFs. They can do a good enough job. Secondly, you can rely on the power of equity fund to create wealth. Diversified funds are known to create alpha over and above the index. That comes with an additional cost in the form of expense ratio but it is well worth it.

You have the risk appetite; direct equities are surely your cup of tea

Now, we come to the most interesting part. As an entrepreneur you have the appetite and the capacity to take on higher risks. You have set up a business from scratch so you can also take calculated risks and monitor them. Direct equities could be the perfect product for you. Why are we focusing on direct equities?

If you do it intelligently and systematically back up with a higher risk appetite, equities can be extremely lucrative in the long run.

Take some examples. INR 10,000 invested in Wipro in 1980 would be worth INR 540 Cr at the current market price after considering corporate actions. Similarly, INR 1 lakh invested in Eicher Motors in 2002 would be worth Rs.16 crore today.

That is the kind of wealth that equities have the potential to create in the long term. As an entrepreneur, you already have the knack of identifying a futuristic business and staying with it. You just need to translate that skill into an investment for your future.

Try to ride the business cycles and stick to stories you understand

As an entrepreneur, you can also invest for the short to medium term to ride the business cycles. Let us understand a little better. Assume you are running a small auto ancillaries unit. So basically you understand your input providers, you understand the auto ancillary industry and you also understand the buyer industry of automobiles.

If you add these together, your plane of familiarity covers a good chunk of India’s market cap. You are dealing with up-cycles and down-cycles in these segments on a daily basis. Why not convert that into an investment theme and also create wealth for yourself. Actually, it is a lot simpler than you imagine and a lot more lucrative for your future!

Diversifying your business risk substantially

Lastly, let your long term portfolio be risk diversified. Avoid concentration risk. More importantly, let your long-term investment portfolio be de-risked from your basic business risk. That is the key!