Why Buy Stocks When You can Always Invest In Business?

Whenever we have conversations about investments in instruments such as stocks or real estate, there is always that one person whose default response is:

The returns are too low, I would make more money if I invested in business instead.

This person almost always manages to derail the conversation from the investment at hand, to a business that makes “way more money” than one could make off stocks or real estate. They are quick with figures: “If you spend 1 million to buy a car and register it on Uber, then employ a driver, every day that Uber will bring you 30,000 bob every month which is 360,000 every year. Mimi, I would rather do that than invest that 2M in stocks”. Often, this person will not have done this business before, and if they did, they always have a reason why the business did not generate the money it promised.

I will be the last person to refute the fact that you could make more money in business than you could ever make as a passive investor. We can debate how many businesses actually succeed and all, but I would like us to think about this differently:

The mindset you use to analyze the returns from a business should not be the same one you use to analyze returns on (more or less) passive investments. See a business requires more than just money and information. It is one thing to know I can make 30% a year from running an Uber business and to have the capital, it is quite another to actually run the business. It requires active management, dealing with car repair issues, hiring and managing a driver, and controls to ensure that the promised 30,000 bob a month actually comes in.

Buying stocks, on the other hand, is a passive activity, save for the investment you make in seeking information about the company. If I buy shares in Unga Limited today, I do not have to worry about how flour is milled and sold by the company – that is the work of the company’s management.

So when one compares a stocks investment to managing an Uber business, they are not making a fair comparison. Maybe if they priced in all the time they will need to manage the business effectively, and the uncertainties beyond the usual market uncertainties.  Finally, an Uber business person will still need to make investments outside of Uber because

In conclusion, always aim to compare like for like.  If you would like to run a business, then compare it with other similar businesses for which you have competence to run. When it comes to passive, or semi-passive investments, compare it with similar investment opportunities taking into account their risk vs return profiles.

Generally, ignore people who try to talk you out of investments by telling you how you could make more running a business. It is never as simple as it seems.