Someone asked me the other day what lessons I learned advising entrepreneurs/businesses which could be applied towards personal finance. As the book The Millionaire Next Door states, an entrepreneur has a higher chance of being a millionaire than employed individuals; thus, the lessons I have learned from my successful clients about business are fundamentally rooted in successful money management and translate well to personal finance. To put this in some context, most of the businesses I advised were small and medium sized enterprises so the lessons are from successful entrepreneurs and not high level executives of major corporations.

In no particular order, these are some of the personal finance lessons I have learned from the business world. The business lessons are in bold and I have translated this lesson into the personal finance field in italic

Find a niche and stick to it/Find an investment strategy your are comfortable with and stick to it

Businesses and personal finance tend to fail because we wander from strategy to strategy, usually as a result of trend chasing. For example, does anyone remember “convergence” in the late 90′s? It was a business strategy to have content providers be integrated with content. AOL and Time-Warner merged as a result, creating a text-book case of what not to do in business; on a very simple basis, the companies wandered from strategy to strategy as the i-bankers dictated the next big thing.

Most successful entrepreneurs I know carve out a niche and stick to it; its the same with personal finance- find a strategy which you are comfortable with (passive investing, active investing, stocks, bonds, real estate investments) and stick to it. I do know someone (not a client) who has both a business and personal interest in mining; he’s done it for 30 plus years buying what most of us would not (penny stock mining company/mines which have been abandoned) as both a business person and investor and never changed his course in spite of real estate booms, oil booms, tech booms etc. Mining was what he knew and mining was all that he ever did. I suspect he had enough to retire on 20 years ago.

Strategy is cheap, execution is the key/Stay invested in your strategy no matter what

In other words, will you blink when the going gets tough and the markets crash or will you stay the course? As much as I love bank stocks, I know someone who loves them even more- that’s the only industry she buys. Year after year, no matter what, she bought bank stocks. When interest rates were in the high teens in 1982 (banks tend to suffer in high interest rate environments) she bought banks. When the S&L crisis hit, she bought banks. When bank after bank hit their version of Enron, she bought banks. Yes, there is a diversification issue with her portfolio but the point is she stuck to her strategy (and hindsight being 20/20, investing in a bank isn’t the riskiest thing you could have bought in the last 25 years).

Surround yourself with the best people and build a good team/always seek investment advice from qualified people

It never ceases to amaze me how many accountants and lawyers entrepreneurs have around them. Not because they are sue happy or love to talk about the changes in GAAP. It is because accountants and lawyers bring different perspectives to the table which help refine decision making. Watch any successful business person on t.v.- most of them have their lawyer close by. It is the same thing with personal finance; the more qualified opinions you have, the better off you are (emphasis on qualified). It may shock the DIY community but I actually have 2 investment advisors (you can kick me out of the membership now) for reasons I will explain in another post. I also have two lawyers and a good friend who is a tax lawyer (good legal/tax advice for the price of dinner) and an accountant. I do not surround myself with these people because I like paying professionals. It is more to do with the fact that their experience and expertise can help frame a particular personal finance question in a different light and I am not making decisions with blinders on.

Focus on Cash Flow and then the Balance Sheet/focus on cash flow and then the balance sheet

I believe it was Buffet who said the best way to become a millionaire was to start a billionaire and buy an airline (someone better help me on this one). Airlines are great balance sheet companies because of the assets they own but poor cash flow companies because their fixed costs are so high; any small down-turn and the airline is losing money.

I suspect I may get some comments on this but net worth (which is what a balance sheet is in personal finance) has never been the top priority for me; its important but not the top. Generating a positive cash flow is key to me. Businesses, like households, run on cash. The greater amount of free cash you can generate, the greater your ability to increase assets. Obviously, I am assuming that someone will have the discipline to convert free cash into assets but I always focus on maximizing cash coming in rather than my net worth. Again, this belief is based on the fundamental assumption that you will convert free cash flow into assets.

Fail a lot when it doesn’t count as much/make your investing mistake young

This may be a strange lesson given Buffet’s first rule (“never lose money”) but, and I believe most parents can relate to this, people don’t learn unless they fail. Failure teaches us lessons better than reading about it in a book. My 20′s was an investing nightmare but my losses were small, I had no one to support and not mortgage. More importantly, I learned from it. If someone were to ask me what my qualifications were for running a financing company, I would answer, in part, that I learned how not to deal with money by failing at it and now I know how to handle money and finance. Far be it for me to criticize Buffet, but “never lose money” for most investors tends to create paralysis- people become more focused on not losing than winning. If you watch any sports, you know that teams that play not to lose tend not to win either. Its a counter-intuitive argument but best to take your investing lumps early and learn from those experience rather than do it when the stakes are high.

Let me know if you have any lessons you want to share, I may post on this topic from time to time given that my clients have taught me so much and I kept thinking of more lessons as I wrote.