Why Business Smarts Are Investing Smarts

A great quote from Warren Buffett goes: "I'm a better investor because I'm a businessman, and I'm a better businessman because I'm a better investor." So let me tell you how to be a better investor by being better at business.

Business knowledge varies among these three kinds of people:

1. Non-Investors: They expect that someone (such as their parents, their kids, a spouse, a company, or the government) will take care of them when their working days are over.
2. Passive Investors: They turn their money over to someone or some organization, such as a mutual fund, to manage. It's the passive investor who tends to believe the financial planners' mantra of "work hard, save money, get out of debt, invest for the long term, and diversify."
3. Active Investors: These people tend to manage their own portfolios and assets, as well as hand-picking their advisors, who are not brokers or sales people. To be a successful active investor requires a higher financial IQ, more real world entrepreneurial business experience, and a very smart advisory team.

For non-investors and passive investors, investing is risky. The main reason is because these two groups of people have no control over the investments they're involved in. While active investors know there's risk, they also realize that the greater the control they have, the less the risk.

Getting a Grip on Business

What do I mean by control? Let me illustrate using the example of driving a car. To be a safe driver, there are six basic controls we all must have:

1. Steering wheel
2. Gas pedal
3. Brakes
4. Gear shift
5. Driver's education/license
6. Insurance

You wouldn't drive a car if you didn't have any one of the above controls. Yet, when it comes to investing, this is what most people do -- they invest without having any influence over the six basic controls of investing or a business:

1. Income
2. Expenses
3. Asset value
4. Liabilities
5. Financial education/management
6. Insurance

The reason Warren Buffett says he's a better investor is because he's a businessman who has control of those six levers of a business. In other words, he can tell how good an investment is by how well management manipulates these basic controls. In most of his investments, Buffett doesn't just buy an equity position, he does his best to buy control of the business.