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Investor vz. Entrepreneur

by Altais on April 29th, 2014

I have fond memories of looking at the Forbes list. It was while looking at the Forbes List in 2002, sitting ideal in office, that I read the name ‘Warren Buffett’ for the first time, and it changed my life, mostly for the better. His wit and wisdom were easy to idolize, and hopefully is leading to some wealth!

While looking at the current list, one thing that I found striking was the difference between number of Investors and Entrepreneurs/ Businessmen in the list.

In the top 100 list, there are only 12 who owe their massive wealth to Investments (Stocks + Real Estate + Others). Even in this list of 12, many owe large part of their wealth to business ownership or operational leverage of managing other people’s money.

Even Warren Buffett, the Icon of Investing, made his initial money in stock markets, but his real wealth came by full ownership of businesses, especially insurance business.

This is quite contrary to general impression about stock market being the place to become very rich.

Please note that we are talking about hugely successful entrepreneurs and investors only. There would be enough failures or modest successes in each category.

The same case is in India. Maybe only 2-3 investors, to my limited knowledge, can be called superrich (say Networth of more than Rs. 1000 crore).

So while stock market might be a good way to become rich, if you are successful in making and keeping money; it’s difficult to become super rich like an Entrepreneur.

Why this difference between promoter owner and part owners?

One of the key reasons for this is that while an Entrepreneur starts by investing at face value, we as Investors pay multiple times of that to invest in the same business.

Let’s take few examples – Average, Good and Great Business.

An Entrepreneur starts a business with Rs. 1 crore of Net worth and leverages with 0.5 Debt/ Equity, (hence total capital at Rs. 1.5 cr), and generates RoE of 15% for 5 years. Then he lists his business at a valuation multiple of 7 in the market, creating a market value of Rs. 3.2 crores. So far so good. For an Investor to create similar value, he will need to compound his money by 25.9% for these five years, effectively eliminating 90% of Investors! And this is for an average business created, with RoE of only 15%!!

The numbers for a good/ great business are just too depressing for a pure investor, so just have a look at the table.

No wonder the wealth lists are so skewed…

Though at one level, there is a sense of justice in this, as it is Entrepreneurs who create value and we just trade value. They normally keep all their eggs in one basket and we keep it in various baskets and shuffle it at the first sign of trouble.

Entrepreneurs put in some of their sweat and blood, and a lot of other people’s sweat (and sometime blood) in their ventures; while we Investors sometimes merely spill some blood on the streets.

So more power to Entrepreneurs, while we piggyback some of them.

From → General Thoughts

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