A great quote from Warren Buffett goes: "I'm a better investor because I'm a businessman, and I'm a better businessman because I'm a better investor." So let me tell you how to be a better investor by being better at business.
Business knowledge varies among these three kinds of people:
Non-Investors: They expect that someone (such as their parents, their kids, a spouse, a company, or the government) will take care of them when their working days are over.
Passive Investors: They turn their money over to someone or some organization, such as a mutual fund, to manage. It's the passive investor who tends to believe the financial planners' mantra of "work hard, save money, get out of debt, invest for the long term, and diversify."
Active Investors: These people tend to manage their own portfolios and assets, as well as hand-picking their advisors, who are not brokers or sales people. To be a successful active investor requires a higher financial IQ, more real world entrepreneurial business experience, and a very smart advisory team.
For non-investors and passive investors, investing is risky. The main reason is because these two groups of people have no control over the investments they're involved in. While active investors know there's risk, they also realize that the greater the control they have, the less the risk.
Getting a Grip on Business
What do I mean by control? Let me illustrate using the example of driving a car. To be a safe driver, there are six basic controls we all must have:
You wouldn't drive a car if you didn't have any one of the above controls. Yet, when it comes to investing, this is what most people do -- they invest without having any influence over the six basic controls of investing or a business:
The reason Warren Buffett says he's a better investor is because he's a businessman who has control of those six levers of a business. In other words, he can tell how good an investment is by how well management manipulates these basic controls. In most of his investments, Buffett doesn't just buy an equity position, he does his best to buy control of the business.
A good business person wants control over their business. For example, if sales are down and expenses are up, a good business person knows what to do to correct the situation. In my real estate investments, as soon as interest rates began to drop around 2000, our team immediately refinanced our debt (liabilities) on our properties, which reduced expenses, increased income, and boosted the intrinsic asset value of the property.
When I invest in real estate, I have lots of insurance. If a building burns or a tenant falls, I have insurance to cover those risks. A mutual fund has no insurance. That is why $7 trillion to $9 trillion were lost when the market crashed in 2000. Today, in spite of not having any insurance against losses, millions of employees happily deposit their money in their 401(k).
Know What You're Doing
The bad news for most non-investors and passive investors is they pick investments that don't welcome investor control. In fact, most non-investors and passive investors invest in the riskiest of all investments -- savings, stocks, bonds, and mutual funds -- all dangerous picks since investors lack control.
Ask yourself these questions:
Do you have control over the dollar's fluctuation in value?
Can you get Bill Gates to reduce Microsoft's expenses or replace its new marketing team?
Do you have any control over interest rates?
Do you know your mutual-fund manager personally?
While I do have some money in stocks, bonds, and mutual funds, most of my resources are in investments I control.
Even worse, most financial advisors -- be they stock brokers, financial planners, or corporate investment advisors -- don't have any control, either. In other words, asking most financial advisors for investment advice is like a asking a taxi driver who's driving a car without a steering wheel, gas pedal, brakes, or insurance to take you to the airport.
That's why investing is risky for most non-investors and passive investors. As Warren Buffett says, "Risk comes from not knowing what you're doing."