Wall Street – Love It or Hate It, Business Owners Need It

Wall Street can be a polarizing subject. Some make it their hobby, keeping tabs on each day’s market movements and trying to strike it rich with the next big thing. Others, like Occupy Wall Street, view it as a symbol of greed, excess, and corruption. However, when it comes to business owners, there is a love/hate relationship with the financial icon. In today’s post, I’m going to explore this relationship and reveal why business owners need Wall Street.

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TIME INDEX:

• 00:50 – Why Business Owners Hate Investing in Wall Street
• 01:20 – Personal Reasons
• 03:26 – Invest in Your Own Business
• 05:40 – Trust
• 07:56 – Politics
• 09:13 – Control
• 10:42 – Summary

Why Business Owners Hate Investing in Wall Street

In a recent post, I mentioned my own experience with Wall Street, as a business owner. As a young (under the age of 18) entrepreneur, I had made over $100,000 in my business and wanted to “take the next step,” so to speak. I visited one of the big box investment firms and met with one of their brokers. He looked at me and said that I had done quite well for myself and that I should come back to see him when I wanted to learn how to make real money.

Let me tell you, as a business owner who had already earned more than most U.S. families earn in a year, I was pretty miffed. I couldn’t believe the audacity and the arrogance of saying something like that to a successful business owner. The truth is, that condescending air of superiority is one of the reasons that business owners hate investing in Wall Street. Business owners already know how to make money and they don’t need someone to teach them how to make “real money.”

Recent Reasons

Still, there are other reasons that business owners don’t care for Wall Street as an institution. Among these reasons are a lack of trust, the desire for control, and political influence and lobbying. With scandals like the Bernie Madoff Ponzi scheme and insider trading, many business owners feel that Wall Street isn’t trustworthy. Likewise, entrepreneurs don’t appreciate the lobbying efforts by Wall Street, a problem that has grown exponentially over the past decade.

As of 2012, Wall Street lobbyists spent $159.5 million. However, that number skyrocketed to nearly $2 billion for the 2018 election cycle. This was a 36% increase over the previous non-presidential election cycle. This is a trend that the head of Americans for Financial Reform, Lisa Donner, described as dangerous, stating, “The impact of all this money —again and again and again —is that it shapes the playing field. Wall Street and the financial industry get to shape the rules in ways that harm everyday people. It has a fundamental impact on the way our economy works.”

Why Wall Street Exists

Despite valid concerns with some of its practices, business owners need Wall Street. Understanding this need comes when we understand why Wall Street exists. Here are the three primary reasons for its existence:

1. To establish a market for institutions to raise capital through a centralized trading area that connects savers of capital with those who want to raise capital. Wall Street trading can come in many forms, including but not limited to the issuance of bonds or the sale of ownership in a business through the issuance of stocks. Wall Street makes capitalism work—with the support of government regulations—by moving money efficiently to its most productive uses.
2. To facilitate a secondary market for existing owners of stocks and bonds to find parties willing to buy their securities so they can raise cash. This facilitation makes markets more successful, as investors have more confidence in the ability to use their portfolio as a source of liquidity. As a result, lower risk premiums are usually demanded.
3. So investors can outsource their capital while they continue their focus on their primary career or activity. This is done through registered investment advisers bound by a fiduciary duty to put the interests of clients above theirs. Such advisors include those that are primarily asset management companies. Likewise, if you’re a high-earning individual, you could pay someone else to handle your portfolio as you focus on generating more money, instead of reading 10-K filings or prospectuses.

What This Means for Business Owners

Knowing why it exists provides us with some solid contextual clues as to why business owners need Wall Street. First, Wall Street gives an opportunity to businesses that have found success but might be struggling to keep things moving as a result of their cash flow. Recently, businesses like ROKU, Fastly Inc., and Zoom have become mainstays in people’s everyday lives. But if not for the ability to have an Initial Purchase Offer (IPO), they might not have been able to gain the capital necessary to float their businesses to the next level. Chances are, this isn’t where you find yourself just yet. But, if it is, congratulations!

However, it’s Wall Street’s ability to facilitate a secondary market for existing owners to find parties willing to buy their securities, allowing them to raise cash, which I think is particularly exciting for many business owners. Buyers of businesses are often a part of the larger Wall Street structure. Just imagine what it would be like to position your business in a way that it could become eligible to go to IPO. If we were to begin thinking a little more like the Wall Street big wigs, we could transform our businesses into the next hot stock.

Here’s the thing, Most business owners have 80% of their net worth tied up in their business. That’s a dangerous position when you consider that only 2 out of 10 businesses that come to market actually sell. Unless you model your business in the same fashion that Wall Street has proven to be successful, then chances are, you’re going to end up being among the 80% of business owners who were never able to sell their company. But Wall Street provides business owners with a way around this problem.

The Magic of Compounding Interest

If we can’t rely on the sale of our business to fund our retirement, then how should we invest? You may say, “Okay, I will invest in real estate.” I love real estate. In fact, it is probably the largest single asset that I have on my books. However, Wall Street’s returns have often been greater than that of the local real estate market. As I say that, I want to make it clear that past performance is not indicative of future results and any assertion to the contrary is a federal offense.

So, if you can’t rely on the sale of your business and you don’t want to invest, what’s the other option? Savings? Let’s take a look at that. Assuming that you want to retire with $2 million in 30 years, you would need to save $41,000 per year to reach your goal. Saving $41,000 per year is just not realistic for most business owners.

RELATED CONTENT: Lifetime Savings Rate: Why Does It Matter?

However, if we invest in the stock market and assume an 8%—I am aware that Dave Ramsey has said 12%, but timelines matter—return, we would reach our goal with an annual investment of $16,375. That’s about $1,365 each month. When you look at the graph, it’s easy to see how compound interest really begins to take off even though our annual contribution remains consistently low. I don’t know about you, but I’d much rather invest $16,000 each year than $41,000. I like to enjoy the fruits of my labor. I’ve never been one to “Get all I can, can all I get, and then sit on my can,” as my dad used to say.

The Challenge

You might be thinking, “Well, Justin, I can get more than that out of my business.” My response would be, “Can you?” If you can, great. But I challenge you to run your actual return on the equity of your business. If you’ve kept good records—and I hope that you have—run your return on equity from the past ten years. When you do, does your return match 8 percent?

If you can do that and say that your return on equity is 9, 10, 11, even 12 percent, then you are a rockstar! However, do you really want to do this for the rest of your life? Because in order for your business to continue to provide returns like that, you’re going to have to do something to make that work.

This is why Wall Street is good for business owners. It provides a passive investment philosophy. It’s slow money but it’s steady money that allows you to focus on your business while you accumulate compound interest. Of course, there is risk involved any time you’re dealing with the stock market, but that’s why you diversify.

As business owners, we diversify away from our business to ensure that even if we aren’t able to sell our business, or if we have to sell it for less than we anticipated, we can still retire with confidence. Likewise, we diversify our portfolios to mitigate the risk that comes with investing. So, let’s diversify as soon as possible.

As always, talk with your financial planner about your unique situation before making any big financial decisions. If you don’t have one, reach out to us. We deal with this every day. It’s what we do.

Wrapping Up…

As a business owner, I understand why you might be hesitant to invest in Wall Street. As a CFP^®, I understand that business owners need Wall Street. Through proper research, planning, and investment diversity, we can give ourselves a leg up on achieving our retirement goals.

Friends, life is hard, but life is good. Wall Street can be frustrating, but it doesn’t have to be. Talk with your financial advisor to see how you can use Wall Street to your advantage. With the correct plan, we can make saving for your future, at least, financially simple.

If you need someone to help you to diversify away from your business, reach out to us. The team at Financially Simple helps business owners just like you, each and every day!