I have always been fascinated by entrepreneurship all my life. What has fascinated me about running one's own business is that many a times, once a strong foundation is created for the business, owners don't work for money but money works for them! It has been my dream to start a venture on my own, one day and grow it to a level which is best in class. However, like most aspiring entrepreneurs, I too had no clue about where to start and what to do. In last 10 years of my career, I have evaluated plenty of ideas and abandoned it for one reason or the other. Some ideas languished on commercial merits, some others lacked the scalability and few others were too big too chase given the limited capital available for investment.
I never thought, I will find a solution to this dogma, through something called value investing. About four years ago I read about Warren Buffet, his invest style, underlying philosophy and principles of value investing. It has been a fascinating journey of learning and unlearning (there was lot to unlearn indeed!) since then. At the heart of this philosophy was the principle enshrined by great Ben Graham that stock is not a piece of paper but part ownership in a business! This is a very simple and powerful concept but unfortunately, majority of the investors never realize this and continue to treat stocks as piece of paper and as a result continue to get mediocre returns from their investment in stock market. However, this simple concept of treating investment in stock as part ownership of business has completely changed my approach towards investing and my urge for starting my own venture. It has dawned upon me that may be it is much better idea to invest in stocks than starting one's own business. I have debated this idea again and again and have reached a conclusion that for many of us, investing in stocks is an excellent way to passively do the business and reap the benefits similar to running one's own business without getting exposed to disproportionate risk emanating from vagaries of business! Here is my reasoning:
- Possibility to part own a business with small investment corpus: For a person coming from middle class, capital has always been a limitation in starting my own business. This is not to say that if there is a good idea, one will not find capital to fund the idea. However, many a times. this is the most challenging part of starting a business. So, if one wants to set up a chemical factory in Ahmedabad of reasonable scale, initial equity contribution required will be of the tune of 40-50 lakhs. This will mean investing one's savings for life in a venture, which may or may not work out. Alternatively, one can invest just a fraction of the proposed investment required for new chemical factory and part own the business of Vinati Organics, one of the largest manufacturer of speciality chemical IBB , a key ingredient for making ibuprofen. Say, if one would have invested 5,00,000 in Vinati Organics in 2009, would have more than tripled in 4 years resulting in annual CAGR of 32%! Even if one compares, return on equity, Vinati would have generate return in excess of 35%! Thus, even with a smaller ticket size, an investor can generate similar or better returns on capital employed as one would have generated by starting one's own chemical factory!
- Minimizing risk through diversification: Imagine, how many businesses one can start with 40-50 lakh? Most likely one, or may be two at the most! As on date, with the same quantum of money, I part own 12-13 different businesses across various industries. This diversification helps me mitigate the risk of losing capital entirely (which may very well happen if I own only one business for umpteen number of reasons including default on payment by one or two large customers!) as my capital is spread across various businesses and each business also has well established customer mix. Diversification also protects me from downside of generating sub-par returns due to headwinds in one or two businesses. Take example of unexpected depreciation in rupee in last one year. Had I been running one business where large portion of my raw material is imported while there is hardly any pricing power available with me. I have seen many small businesses going broke in last one year due to sheer depreciation in currency. On the other hand, current portfolio of businesses that I own consist of few businesses which are negatively impacted because of rupee depreciation (Cera/Astral) while the other set of export oriented businesses have benefited from rupee depreciation. Thus, in the end overall impact on earnings is minuscule. The moot point here is that many a times, if one has invested in a portfolio of carefully chosen quality business, tailwinds in few businesses will compensate for the headwinds in few other businesses thus, protecting investors from permanent loss of capital.
- Access to the best managers for running the business: When one invests in stock run by competent management, one is getting access to the best managers running a business he has put his money on! As an investor one can have an opportunity to side with and ride with people who have complimentary skills, which are unique to them, and has significant value. As an investor in the company, this skill is available to you at minuscule cost, but benefits derived from such skill can be enormous! If one was running his own business, access to people having such complimentary skills is prohibitively expensive and hence the odds of making extraordinary deals/returns are significantly lower. At the folly of repetition, let me give you example of investment in Piramal Enterprise. There was an opportunity with investors to side by one of the best deal maker and wealth creator Mr.Piramal at free of cost! Moreover, the ongoing businesses of PEL were available at throwaway price after he sold his formulation business to Abbott. Similarly take example of Mayur Uniquoter. Mr. Poddar, the founder of Mayur, is one of the oldest hats in the business and has uncanny understanding of the dynamics of business. As an investor in Mayur, I have access to the skill and competence of Mr.Poddar and his team in deploying and managing the capital I have invested in. This kind of access to people would be unthinkable for someone starting his own unit of manufacturing synthetic leather.
- Buying business ownership on your own terms: This is vital. It is important to choose which battles one fights and ideally one should choose the battles where odds of winning the battle are conspicuously in his favour. Though life doesn't give you an opportunity to choose your battle, but market surely does give you the flexibility of not only choosing the battle one wants to fight but also the option of choosing the battleground and timing as well! We, human beings, are not rational all the time, especially when it comes to matters related to money! Markets, which is confluence of human opinions and sentiments, is a perfect place to look for pockets of irrational behaviour. Fear and greed, both are found, in abundance in the market. This sets a perfect stage for getting great bargains which no owner, in his right mind, would ever offer. As a businessman, this is the best place to look for, if one wants to buy businesses at substantial discount or sell them at staggering premium! So, one can wait to invest in a business at significant discount to one's own perceived value of the business. In private transaction this would have never happened. Just imagine what would happen if you offer to buy a growing and profit making company at value less than cash sitting on the books? Most likely, you will be thrown out of the door! However, as an investor in the market one can get the opportunity to invest in cash bargains of some very respectable companies many times in one's lifetime!
- Flexibility to exit: Even if you are running a proprietary company, it takes while to complete all the formalities to close the business and down the shutter. The process is far more involved if it is a private limited company.One has to continue to meet compliance requirements till all the accounts are settled and money distributed to all stakeholders. If the business involves more than one partners,the matter gets further complicated, if some of the stakeholders want to continue the business while you want to exit. While one invests in stock,even though, you are a part owner of a business, you can exit the business, for whatever reasons, on a click of a mouse and get the proceeds deposited in your account in two days! This, again, is extremely useful, when in your judgement, the business is going down hill, management shows lack of competence or you just have a better business to invest in!
Having put forward some arguments in favour of part owning a business through investing in stock versus starting one's own business, I do acknowledge that there are some obvious shortcomings of only having part ownership in a business which can negatively impact one's prospects of creating wealth in the long term. But, I will keep those shortcomings and ways around those shortcoming aside as topic for my next post!
As always views are welcome!
