“Owning a non-controlling portion of a wonderful business is more profitable, more enjoyable, and FAR less work than struggling with 100% of a marginal enterprise.” — Warren Buffett
In 2015, our business checking account had $8 million. To chase further growth, we wrote thousands of pieces of marketing copy, created hundreds of content videos, spent millions to produce live events, set up–and closed–an office in Ireland, and hired and fired around 30 people. We should have bought Amazon stock. We could have sat on a beach for 10 years while our $8 million grew to $54 million. For tens of thousands of hours, we toiled to produce far less with our own business than we could have produced investing in someone else’s.
In December of 2015, Amazon’s stock price fluctuated between $640 and $694 per share. With the $8 million in our bank account, we could have purchased 11,994 shares. In 2022, Amazon split its stock 20-for-1; our 11,994 shares would have become 239,880 shares. Amazon’s split-adjusted stock price today, February 19th, 2025, is $225 (that’s $4,500 per share on a pre-split adjusted price). Our shares would be worth $54 million.
Instead, here’s what actually happened. In 2015, we produced sales of $31.8 million and net income of $3 million. The following year, 2016, our sales dropped to $6.8 million and our net income fell to negative $782,025. In 2017, our sales increased, though not to our previous level, to $21.6 million and our net income increased to $445,212. Despite our continued investments of money and effort, over the next seven years, our sales declined to $2.5 million per year–a 92% decline–and we produced an average net income of $772,983 per year. Between 2016 and 2024, our company produced a total net income of $5 million. Our true owner earnings–including cash compensation paid to me and the other co-founder, before I bought him out–is a couple million dollars higher. Let’s call the total after-tax earnings produced in the past nine years $7 million, all-in.
Had we invested in Amazon stock, our compound annual growth rate would have been 23.6% per year. Instead, by reinvesting in our business, we produced a compound annual growth rate of negative 1.5%. We successfully turned $8 million into $7 million over 9 years by working very hard. Take that, Bezos.
Owning a small business is a great way to earn your first few million dollars–and a reliable way to destroy millions. All businesses are unpredictable, especially startups. Capitalism invites others to copy business models, products, and methods–and sell cheaper–until only few make money. As Intel founder Andy Grove said, “Only the paranoid survive.”
Once entrepreneurs realize the fragility of their ventures, they diversify. Most lose money. They invest in small, fragile businesses at inflated prices. Creating wealth doesn’t prepare entrepreneurs to invest it.
To invest well, search across markets, geographies, and business sizes. Wait for a sure bet. Once committed to an investment, wait–sometimes years–for it to appreciate. It can be like watching paint dry. Waiting–vital to investing–is an underdeveloped skill for entrepreneurs.
To whip most investors, buy index funds. Set up and deposit money into a brokerage account (such as Schwab.com). Invest in low cost index funds (I recommend Vanguard ETFs) to prosper from the growth of hundreds of the world’s best companies.
Avoid private equity, venture capital, and any investments that enrich promoters. Most such investments won’t perform well enough to cover their high fees.
Aim for appreciation, not cash flow or dividends. An investment that distributes $10,000 has an equivalent effect on your net worth–likely worse, after taxes–as one that appreciates by $10,000. Those who offer regular cash payments in exchange for upfront money often do so to trick people into second-rate investments.
To outperform index funds–a difficult task–concentrate your investments. “Diversification is for the know-nothing investor,” late billionaire Charlie Munger once said. Learn stock market history, investor psychology, how to read public company financial statements, and how to value businesses. Otherwise, you’re gambling. Start small. Examine companies you easily understand, like those that make products you buy or are similar to companies you’ve built or worked for. Read annual reports (10Ks) and quarterly reports (10Qs) (available at sec.gov), and listen to earnings calls (I use seekingalpha.com). Calculate the per share value of companies you might invest in. Only buy a stock if its price is half or less its value. Repeat until you have a portfolio of five to ten stocks.
As an entrepreneur, you take risks, solve problems, create products, create jobs. You’re a hero. Learn to invest well to multiply your wealth. Make your money work as hard for you as you worked for it.