Entrepreneurship is the heart and soul of the great American economy. It is a fact and manifests itself in so many successful and not-so-successful startups, self-made billionaires and success stories. Most of my friends and acquaintances are either running a startup or planning to start one. These folks are highly educated, successful in their fields and very ambitious. I am sure this is not unique to just my limited network but a typical story of an immigrant community in America. While a startup is a great way to unleash one’s potential, I am surprised how much of it hinges on the next great “idea”. Most people consider idea and startup as synonyms especially in the technology industry. I keep hearing – “I have this great idea” or “Do you have a good idea? We can make a business around it”. I wonder how much of a successful startup is about a great idea.
The biggest risk with a startup is to not find a viable business model. Since most start-ups are genesis of an idea, they generally lack a sustainable business model at least in the beginning. Startup failures galore, the rare success stories are full of mid-course correction or stumbling upon something different while working on the original idea. I believe it is not an “idea” but a “market-validated idea” that should be the basis for starting a new business. It is easier said than done as most of the time it is not easy to articulate the concept in early stages, let alone validate it with potential clients or markets. However, this is not a reason to cut the process short. It can save entrepreneur toil, frustration and lost capital on a promising yet non-sellable idea.
I recently learned in a “pragmatic marketing” training that “your opinion is interesting but irrelevant”. I thought it summarized the idea-based startup thinking very well. Everybody has an opinion [read idea] but is it worth launching a business or a product around it? Only a factual research can confirm it. There is a reason that early-stage business cases have sections on market research, sizing and potential customers. A thoroughly researched, market-validated idea is certainly worth taking a dip into the entrepreneurship ocean. Otherwise, it doesn’t hurt staying on the sidelines and enjoying the sun! So next time when you hear a cool idea, ask how many potential clients also found it useful.
There couldn’t have been a better start to Saturday morning than reading Warren Buffet’s 2010 annual letter to shareholders. Although my wife doesn’t endorse this as a perfect start or she might actually hate it because I dropped all the weekend chores for it. However, now that I have resumed the chores by taking my car for a wash, I have some time to reflect on Buffet’s letter and write this blog. As always there is plenty of wisdom in his letter but there is one thing that stood out for me – financial prudence and his grandfather’s letter about savings.
I grew up in a culture of spending. Rich people show off their money by lavishly spending while middle class try to keep pace mostly through borrowing or mortgaging their future earnings and property. The rule is, if you can’t spend, you can’t get into the elite circle. Fortunately or maybe not, I grew up in a well-to-do family that deeply endorsed this culture. I grew up thinking spending on luxury is the way of life. It was only in my under-grad school that I started thinking about money and how to become rich. I was a Curious George looking for a formula for success. As weird as it may sound, but I got my first life-changing advice about money from a stranger on a train. He told me that it is not spending but savings and investments that make you rich. According to him the rule of thumb should be-a bachelor should save 75%, married couple 50%, and couple with kids 25% of their income. The second step is to invest it prudently to grow your asset base. First time in my life, I learned about the other side of the equation-savings! Thanks to that man, I got interested in stocks, property and other investments and was keen to start working to make, save and invest money.
Buffet epitomizes the conventional wisdom of the man I met on the train. He is a testament that one can become the richest man and build one of the most prosperous companies in the world through simple financial prudence. However, I am surprised by how many smart people still don’t get it. No wonder in my hometown, many folks still see only the spending side of the equation and continue to get trapped in debt. If only they could meet the man on the train or read Buffet’s letter. Well, I don’t know the whereabouts of that man but you all can read Buffet’s letter here!
For a change, my fight from Chicago left on time, actually in a hurry due to an impending snow storm. I have been to O’Hare many times in the past but have never seen this urgency by the flight crew to take off. I love it as it gets me home in time! Well it reminds me about another thing I love, the return on my stock portfolio. Don’t we all like it? No wonder CNBC is such a profitable channel. However, sometimes I wonder if it is the real return that satisfies a common investor or the excitement to pick a successful stock to beat the market [read fellow investors].
I first got interested in stocks when I was a sophomore at IIT. The dot-com bubble had markets in a secular bull run and I was cultivating ambitions to get rich, quickly. After devouring most of the top-selling stock analysis books, and regularly reading “The Economic Times”, I started thinking of myself as a stock market expert. I didn’t have any money to invest but I was advising people on stocks. Thanks to the booming market, many of my predictions came true, further strengthening my confidence as a stock picker. I didn’t even wait for my first paycheck to start investing and some early successes further led me down that path. The dot-com crash was the first real blow to my portfolio and confidence. I lost 70% of my investment in a few weeks. In next eight years, I endured three stock market booms, two crashes, and two failed attempts at creating investment management companies with some very smart people in the trade. Not that I have done and seen everything but I believe I have gained slightly more exposure to stock market investing than a typical retail investor. I learned some lessons the hard way but I am glad I learned them early.
This blog is not about rules of investing, although I can probably write a thesis on my experience in this subject. My objective is to highlight two key points, which I believe every common investor should know while investing in stocks. First, a common investor has no advantage in the market except for being patient. By the time CNBC runs a story, smart money has already acted on it. Experts outdo retail investors on research, access to information and trading tools by a wide margin. However, everything is not lost for retail investors. Time is on our side and it is a big advantage. Not having to report returns every day, week, month and quarter is a great advantage that no professional investor has in the market. The mantra is to buy good companies when they are selling cheap and sit on it. Trust me that is the only way for us minnows to make money in the market. Second, don’t fall for multi-bagger or trading stories. I know for sure, if someone can consistently make money in the stock market, I will probably see his picture in Forbes before meeting him in person. Look around, even the savviest investors couldn’t make money forever. Warren Buffet is an exception but even he had his down years, albeit I will make a case that he made money by following a common investor’s “buy and hold” strategy. So next time you hear somebody consistently beating the market by trading or flipping stocks – acknowledge, congratulate and carry on with your boring buy and hold strategy.
The stewardess has already told me thrice to shut down my computer so I will end my post here. Finally my rocky plane ride is coming to an end. Unfortunately a rocky stock market is here to stay but there is a hope for all of us to make stable returns. Buy cheap, hold for long and sell for profit. Make some money folks!