A Cautionary Business Investing Tale

In 1973, a man in Connecticut took out an $8,000 loan to start his own business that would provide maintenance to make-up air units at commercial locations. Through grit expressed by his willingness to work hours and provide sophistication in the field of commercial infrastructure, he was able to diversify his business operations to include office fit-outs, electrical design builds, and security lighting to the residents of New Haven, Connecticut over the years.

He sold his business for $18 million in 2014 and effectively retired on the advice of an accountant who sensed that the valuation for his business was at the high point of the cycle.

A few months ago, I got an e-mail from this man’s widow telling me that he grew bored and depressed after he sold his business and lacked a purpose in life. She gave me permission to discuss his story broadly to inform the thinking of other individuals pursuing the sale of their family-run businesses or retirement from their profession.

A flaw in the investment writing blogosphere is that topics like financial independence are always discussed without any mention of what is going to be done once the desired assets are acquired. If the goal is to become a slacker, that may be your entitlement upon the accumulation of wealth, but I think it is a poor use of the 25,000 days of life the universe grants you.

Perhaps a more pressing problem is that the successful accumulation of wealth can make you rudderless and aimless because subsequent goal-setting seems pointless. I advocate stock-market investing because it is a great way to maximize surplus capital from your labor, but it can rob life of purpose if passive investment sources are used to completely displace labor. It can also make you fragile in the face of conflict because the necessity of providing for your family is absent as a motivator. The great things you build in life necessarily involve labor, and labor necessarily involves conflict points, and it is a lot easier to give up during these conflict points when your labor is entirely discretionary.

These types of conversations seem to be largely absent in the field of investing. I understand that this is because motivational reasons are entirely personal and fact-specific, and are therefore harder to rely to a mass audience.

When a financial topic is difficult to discuss with precision, approximation may suffice.

Some general rules I would offer:

First, partial retirement is vastly underrated as an option. When it is discussed at all, the context is about taking up a job at the local library after you retire to stay engaged with the community. But there are other options that don’t involve a career change. Business owners can scale back their time commitments by gradually delegating day-to-day decisionmaking. Lawyers, doctors, and dentists can reduce the number of clients they take on. The most famous chiropractor in St. Louis takes Thursdays and Fridays off in addition to Saturday and Sunday. He gets to pursue his leisure interests while still keeping his faculties and talents engaged. You should hesitate before walking away from your craft when you have developed sophistication at it and have built a network within it.

Second, I think you should recognize when your preferences are out of step with the conventional thinking. I can’t tell you how many articles I’ve read about avoiding thinly traded stocks because those positions can be difficult to off-load and carry extra volatility in price. To this day, my favorite investing experience was buying a micro-cap bank that had a book value of $21 per share and was trading at $13 per share. The price I entered for the order affected the stock price, since it only trades about 400 shares per month. I loved doing that. The conventional wisdom can take a flying leap. If you disagree with my financial commentary, you’re free to take my ideas and tell ‘em to shove off. Most financial planning is very generic and stale and designed during the post-WWII boom, and you are welcome to regard it a as a cafeteria buffet–pick up what you like, leave the rest.

Third, any time you give up something that takes up a significant chunk of your time, you should have a predetermined plan about what to do that will fill the time that becomes available. And it would be wise to conduct a trial run to determine how satisfying the replacement activity turns out to be.

Financial advisors have an incentive to recommend that you pursue the “liquidity event” of a business sale because it can translate into regular fees if you turn and hand them the cash to invest for you. More benignly, advisors have a bias in favor of change because saying “Keep doing what you’re doing!” feels like a waste of $150 per hour even if that’s what is in your best interest.

If you’re going to sell your business or practice, you should know what you’re going to do with the “free time” that becomes available. And personally, I think finding a way to scale back your commitment while maintaining control and participation in the business is a neglected option that should be considered as a first resort because it can help you maintain cash flows and build upon the purpose you’ve already created for your life.