{"id":4239,"date":"2017-02-06T05:14:04","date_gmt":"2017-02-06T13:14:04","guid":{"rendered":"http:\/\/evergreensmallbusiness.com\/?p=4239"},"modified":"2017-01-25T13:37:21","modified_gmt":"2017-01-25T21:37:21","slug":"entrepreneurs-as-active-investors","status":"publish","type":"post","link":"https:\/\/evergreensmallbusiness.com\/entrepreneurs-as-active-investors\/","title":{"rendered":"Entrepreneurs as Active Investors"},"content":{"rendered":"

\"Picture<\/a>After I did the first couple of blog posts about insights I\u2019d gleaned from David Swensen\u2019s wonderful book, \u201cPioneering Portfolio Management,\u201d I thought I was done.<\/p>\n

But a few days later, a conversation about the book with an entrepreneur made me realize Swensen also perhaps unintentionally provides some really useful information about why entrepreneurs (including executives and small business owners) shouldn\u2019t be active investors. Because Swensen\u2019s insights make so much sense, I want to share them here with you..<\/p>\n

Er, don\u2019t worry. This will be quick. And let me just say this: Everything I say here applies to me too.<\/p>\n

Entrepreneurs Have Wrong Mindset for Active Investing<\/h2>\n

A first interesting point\u2014which makes more sense the more I ponder it.<\/p>\n

Are you an entrepreneur? Or a small business owner? Or a senior executive? Okay good, you’re who I’m talking to here.<\/p>\n

You know that mindset you have where if you encounter something that works, you do more that? And if you find yourself losing at some activity, you cut your losses?<\/p>\n

That \u201clet your winner run and kill off your losers\u201d mind-set is exactly the wrong<\/em> way to approach active investing.<\/p>\n

This approach\u2014which in active investing is called momentum investing\u2014results regularly in you buying high and selling low.<\/p>\n

Swensen, in his classic book \u00a0\u201cPioneering Portfolio Management,\u201d talks about this mindset mismatch when he describes how executives on the Yale Investments Office\u2019s oversight committee think the wrong way about investing successes and investing failures. The core problem is that these executives have the wrong \u201cmomentum-based\u201d mindset. They are professionally programmed to stop doing what doesn\u2019t work and then double-down on what is working.<\/p>\n

Successfully active investors need to do the opposite. Success active investors are contrarians. They need to sell off their recent winners and then double-down on the losers since the today’s winners become tomorrow’s losers and today’s losers become tomorrow’s winners.<\/p>\n

Entrepreneurs Already Earn an Alpha Return<\/h2>\n

A quick related point: Entrepreneurs, including senior executives and small business owners, also don\u2019t need to reach for an extra return from active investment.<\/p>\n

The reason I suggest this? You probably already have a great way to earn a generous alpha return if you\u2019ve got a stake in some entrepreneurial venture (including ownership of a small business, direct real estate investments,\u00a0or equity based executive compensation.)<\/p>\n

In other words (and see if this sounds familiar) you know that mindset you have where if you encounter something that works, you do more of\u00a0that? And if you find yourself losing at some activity, you cut your losses?<\/p>\n

That \u201clet your winners run and kill off your losers\u201d mind-set is exactly the right<\/em> way to approach entrepreneurship. In business and in entrepreneurship, a “momentum-based” mindset is the route to riches.<\/p>\n

Entrepreneurs Can Easily Invest Passively<\/h2>\n

A final, subtle point: The one thing about passive investing as compared to active investing is that passive investing is easy and scalable. Which are great qualities if you’re already busy with another venture.<\/p>\n

If you go passive and just select a handful of cheap index funds, you don\u2019t need any particular expertise to invest even large sums.<\/p>\n

Note:<\/strong> As I\u2019ve noted in a bunch of blog posts over the years, I personally use the passive investment approach suggested by Swensen in his other investing book, \u201cUnconventional Success.\u201d That approach plops 30% of someone\u2019s savings into a US stock market index fund, 15% (each) into a developed international stock market fund, a REIT index fund, an intermediate treasury bond fund, and an inflation protected treasury bond index fund, and then 10% into an emerging international stock markets fund.<\/p>\n

And with a passive investing approach, you\u2019ll beat (because of your low costs) most active investors and with very very modest work. Thus leaving you time to do what you do best\u2026 which is creating or running a business.<\/p>\n

Related Posts You Might Find Interesting<\/h2>\n

Index Funds and Asset Allocation Even Better for the Wealthy?<\/a><\/p>\n

Applying the Logic of Asset Allocation to Your Small Business<\/a><\/p>\n

Financial Planning for the Top One Percent<\/a><\/p>\n

David Swensen’s Tips for Active Investors<\/a><\/p>\n

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 <\/p>\n","protected":false},"excerpt":{"rendered":"

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