Business men only invest in their business, should they?

November 26, 2018

 

I was with a client discussing the portfolio and aspects of the markets, when his friend dropped by. My client introduced him as a businessman who was running a successful leather products business with exports to many foreign countries. My client added that his friend should also consult me for some financial investments. However, the friend said that he preferred investing into his own business since it gave him a better return. This is not the first instance I came across a businessman who continued to invest into his own business.


But the counter to him was:


1. Every business man wears two hats, one is that of an owner (for which he is eligible to receive dividends) and one is that of a CEO (for which he is supposed to receive a salary). Our view is that the portion that he receives as salary must be partly used to set up an investment account for creating a corpus for future needs. While he is at liberty to reinvest the dividends he receives, if the business man does not receive the two components then at some level, he is compromising on either of his roles.


2. All Businesses have their good times and not so good times and an entrepreneur needs to keep liquidity, separate of business, to ensure that in times of need he can use the personal investments for his family’s needs, if the business is unable to support them.


3. Even within business, today there is an increasing need to use investments to create a corpus for a rainy day.

 

DIVERSIFICATION OF ONE’S INVESTMENT IS A KEY TENET OF SENSIBLE INVESTING. 


Turns out that my business friend was doing none of it. He did admit that a few years earlier when some payments from his customers were delayed, he went through a tough cashflow situation. Therefore, he agreed to start a small investment account to keep some money away from business.

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