Thursday, March 12, 2009

Beat The Street

Originally Published 10.24.08

Because of the recent performance of Wall Street, a lot of people are worried about their investments. Yet, small business owners, by and large, sleep better than the average investor.

The bulk of the small business owner’s portfolio is in himself. He invests in his own company, his own future, and can directly influence the return. Small business owners who work hard and work smart can generate significant returns over time.

Wall Street investors are restless because they have so little control. The mutual fund owner depends on the vagaries of the market. As a rule, no investor can consistently beat the market, though many try. Investors profit as the market profits as a whole.

The small business owner can be the market. He can grow faster, generate greater returns, and operate as conservatively as he chooses.

Anyone who invests in publicly traded equities or mutual funds is turning funds over to the smartest guys in the room who know everything about finance, but nothing about real value, about building a product, delivering a service, or creating real wealth.

Wall Street’s original role was to assemble capital from divergent sources and provide it where it can earn higher returns for the purpose of making business more efficient. That’s a legitimate and necessary function for a market economy. But somewhere the smartest guys in the room outsmarted themselves with credit swaps, derivatives, and other arcane financial instruments that are parasitic and do little to help fund industry with the capital it needs to expand.

Small business owners, meanwhile, create real wealth, deliver real value, while growing their businesses and creating jobs. I’d rather invest $10 in ten different small businesses run by Joe the Plumber and his peers than put $100 in any mutual fund run by an Ivy League MBA.

More than any other investment, I’d rather put money in my own company because it’s the only company where I can directly influence the return. If you own a small business, I bet you feel the same way.

If your business is profitable, every extra dollar it generates is taxable. If you take the extra dollar and reinvest it in your business before the end of the year, it won’t get taxed. From an investment standpoint you’re already ahead, provided your company is a good investment.

The argument against investing in your own business is that you’re putting all of your eggs in one basket. If you’re business stumbles badly, you could lose it all. Yet, in today’s equity market environment, even blue chip stocks are volatile. Your company is probably a safer investment than the market. Certainly it’s less sensitive to Wall Street’s mob mentality. It’s also your best and surest shot at exceptional returns.

The small business owner’s best returns come from investing his company. While the external business environment is outside of the small business owner’s control, everything internal to the company is within his control. The small business owner has more ability to influence his own company’s fortunes than any other possible investment.

Your company can beat the street.

© 2008 Matt Michel

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