Certain qualities of highly successful entrepreneurs that fuel the growth of businesses could sometimes be the same characteristics that stunt long-term wealth creation and preservation, outside of the entrepreneurial venture. Insiders at Stonehage Fleming Investment Management reveal that often entrepreneurs with the Midas touch of converting ideas into business successes don’t necessarily make good investors; nor custodians of the wealth they created for future generations.
We continue to see many examples where the traits that propel entrepreneurs to create wealth through their businesses, have worked against them in their investment journeys. Some of these traits are confidence, control and risk-taking.
Successful entrepreneurs who’ve overcome incredible odds tend to be highly confident individuals and back themselves to overcome just about any challenge. Unfortunately, this can lead to over-confidence in areas where their expertise is lacking, such as investment management.
Over-confidence can trigger poor financial behaviour that leads to sub-optimal wealth management. Examples of what we have seen in this regard include overriding recommended investment mandates, trying to time market entry points to the currency and stock market, speculating in high risk ventures and ‘investor intervention’ when short term results are unsatisfactory.
In reference to the last point, entrepreneurs are known for taking action. While a necessary habit in business, wanting to intervene in an agreed investment strategy can lead to knee-jerk investment decisions that destroy value. There is a lot to be said for patience and sticking to an agreed mandate, those are typically the investors who experience much better investment outcomes.
After many years spent building a business from scratch and achieving enormous success, it’s not always easy to relinquish control of the wealth tied up in an enterprise. Yet it’s crucial to diversify wealth from a de-risking perspective, especially where it’s invested in a single business; followed by selling the business or by passing it on to the next generation. In the recent past, we have seen a number of large South African corporates destroy enormous shareholder value, exposing in particular those investors with concentrated share holdings. This again highlights the risk of not following a timely diversification strategy.
Entrepreneurs can sometimes be so busy ‘being successful’ that the vital questions such as de-risking, diversification and succession planning are often overlooked. We’ve seen many South African entrepreneurs with 100% exposure to South African assets, who don’t follow a global wealth diversification strategy soon enough. To avoid this, it’s critical to partner with an individual or firm with the expertise to extract wealth from a business by following a systematic and disciplined approach and to successfully manage wealth realisation, diversification or ultimate transfer to the next generation.
Entrepreneurs often have to risk most of what they own to get an idea off the ground. The fact that they accept the real possibility of bankruptcy, is key to what sets them apart from the rest of society. Many are quick decision makers and thrive on the risk and thrill of new opportunities.
It’s not uncommon to see entrepreneurs investing large sums in highly speculative investments that have a low probability of producing long-term intergenerational wealth. Often goaded by peers, they act on impulse, putting capital at excessive risk. There are also those who see themselves as risk-takers but want to run for the hills when an investment underperforms. When the market turns against them, they quickly override the investment strategy they’ve agreed to in favour of a more conservative approach.
Investing is generally more successful with a clearly defined strategy. This includes defining a desired outcome, a time horizon for that result, and the asset allocation likely to deliver the returns required for a given level of risk. For entrepreneurs (and wealthy investors), it’s also very important to understand and document the purpose of their wealth, considering longer-term holistic objectives, such as family requirements, business goals and philanthropy, to name a few. With their objectives clearly defined, it should be easier for entrepreneurs to stay the investment course in times of market turmoil, in addition to being aware of how certain entrepreneurial traits can lead to sub-optimal investment outcomes.
Riaan Swart is a director at Stonehage Fleming Investment Management, South Africa.