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What is the difference between the business of investing and investing?
Creating art is different from selling art, and the same goes for investing – the business of investing is different than actual investing. Not knowing the difference may cost you the opportunity to retire with enough money to enjoy the rest of your life.
Any kind of business is ruled by the following equation:
Revenues – Expenses = Profits
It doesn’t matter whether the business is a hair salon, cable company, or investment company, unless revenues exceed expenses, the business entity will eventually fail. There will not be enough money to pay for employees, rent, and other expenditures necessary to operate the business.
The Recipe For Failure
A wise businessperson knows that if the company’s product or service does not satisfy its customers, the customers will eventually leave and the business will suffer. For example, it is possible to lure customers into a restaurant with clever promoting and advertising; however, it is difficult to get them back if the food and service are terrible. The time between the product trial and product evaluation is short, and therefore, people learn very quickly which businesses to support and which businesses to avoid.
The investment industry also adheres to the same business equation; however, the investment business is unique because the time between the product trial and product evaluation is extended. This allows Wall Street to be more focused on their own profits than on your well-being because it will be a long time before you notice that they have taken advantage of you.
The Fine Print Your Advisor Missed
Through various marketing efforts, the industry convinces the general public that the key to wealth is to work hard, save, and invest in a diversified portfolio for the long term. Most people would agree that being lazy, irresponsible, and spend-thrifty is not the recipe for wealth; however, the opposite does not guarantee success. Working hard, saving, and investing is not enough for future financial success unless your money from hard work and savings actually grows through successful investing.
The Conflict Of Interest
The problem is that the investment industry does not generate revenues from your investment success. Instead, it makes money by charging you commissions and fees which take away from the growth of your investment portfolio.
Did anyone wonder why the industry was not recommending an investment in Warren Buffett’s Berkshire Hathaway decades ago which would have made a small investor a multi-millionaire by today? Because the industry does not make money by recommending good investments. It makes money selling investments that generate fees. Warren Buffett summed it up very well:
“Wall Street makes its money on activity. You make your money on inactivity.”
The industry is interested in growing your money just enough to keep your business, but wants to keep anything beyond this minimum for themselves. Unfortunately, they can keep this scheme going on for years because the majority of people do not place much emphasis on saving and investing. They are focused on day-to-day activities and don’t want to bother.
Trust Us, We’ll Do It For You
In addition, the investment industry convinces people that investing is just too difficult so they don’t even try and simply hand over their hard-earned money to individuals that don’t have their best interests in mind. There are only two solutions:
- Educate yourself on investing
- Find a true investor, not a salesman, to handle your money.
Mariusz Skonieczny is the founder and president of Classic Value Investors, LLC, an investment management company. He is also the author of Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market.