Investing in stocks is a bit like running a business. The skills of an experienced investor and the skills of an entrepreneur are about the same. To truly understand our investments, we need to learn about accounting and financial management, corporate structure, business law, sales and marketing, research and development, manufacturing, distribution, inventory, and a hundred other things. As investors, we have people who do all these things for us, but to determine if they're doing a good job we have to understand it for ourselves.
Of course, beginning investors aren't expected to know most of the things experienced investors pick up along the way, and nobody said you had to start out as an expert just to participate in the game. The Fool offers dozens of resources to get new investors up to speed, from our published books, to the Fool's School, to the Rule Maker Steps.
We also recommend that new investors pay down their debts before worrying too much about investing in stocks, and to use that time to study the market and try out a few "paper portfolios" before committing their own savings. And, of course, we diversify our holdings a bit so we don't have to be omniscient. Our portfolio is prepared to survive and prosper even if Coca-Cola's (NYSE: KO) 100-year history of greatness passes into the hands of people who couldn't sell ice in a desert.
Successful entrepreneurs can be seen as really intense investors. They use their investment capital to create a small business in which they own the majority of the stock, and they get to actually make all the business decisions the rest of us merely get to vote on. The downside of this is that they MUST make those decisions, whereas our investments don't phone us at 3:00 a.m. to complain that a water main broke, and we don't have to work late into the night to keep the price of our shares from going down.
Entrepreneurs combine their day jobs with their investing activities. They're putting all their eggs in one basket with this one new holding they've created, but in return they get manual control of their investment capital, and they get to be their own boss. The risks are higher (the majority of all start-ups fail), but the potential rewards are correspondingly greater. And, if nothing else, the entrepreneur gets the lion's share of those rewards.
A lot of successful entrepreneurs are experienced stock market investors. In part, this is because investing develops skills useful to entrepreneurs, so entrepreneurs with investing experience are more likely to be successful.
Another important factor is that you need a lot of money to start a business, and one thing successful and experienced investors are likely to have is a lot of money. Interestingly, many of the "young kid strikes it rich" success stories are actually "young kid with rich parents strikes it rich on the second or third attempt," including the stories of Bill Gates (whose first company was called Traf-o-data) and Michael Dell (Dell Computer was his third business, I believe).
The company I'm writing this article for, The Motley Fool, was founded by two brothers who had been investing since childhood. They built a successful company because they knew how it was done, and even if their investments up until that point didn't supply them with a bucket of capital to finance the business, they did provide enough of a psychological cushion that neither David nor Tom felt they had to work a day job nonstop to avoid starving to death.
If increasing experience leads investors to graduate from savings accounts and mutual funds to investing in the stocks of publicly traded corporations, then the best and brightest of the stock market investors tend to graduate to running businesses. Perhaps they wind up owning a controlling interest in a small company. Maybe they wind up with enough shares to win a seat on the board at a larger company.
Or, perhaps they form a start-up company in their garage, and use the same principles of capital allocation and compound interest to someday wind up with a huge office building and 100 employees. Perhaps they'll go public, and the rest of us will be able to invest in their stock.
It could happen.
-- Oak
