Investing in troubled times

2010

Here's an interesting insight from the tail end of last year. According to Babson College Associate Professor, Joel M. Shulman, in these troubled times, one of the few sensible pieces of investment advice is to bet on entrepreneurs.

Writing in The Investment Professional, Shulman says that his research into 27,000 publicly-traded global companies using over 12 years-worth of data demonstrates that entrepreneurial companies consistently outperform their nonentrepreneurial peer companies by a wide margin.

In 2009, for example, stocks of entrepreneur-led companies significantly outperform non entrepreneurs – in fact as of December 2009, 650+ global entrepreneurs were up 93%.

Shulman argues that the reason for this is simple. Entrepreneurs try to keep costs low while vigorously growing the business, meaning that entrepreneurial companies are well positioned to perform better than ever in a sluggish, recovering economy. Apple Computer is one classic example he cites of this mindset.

Nonentrepreneurial companies, on the other hand, require cheap capital to support their inefficient ways. They create bloated organizational structures, payrolls, and layers of red tape – becoming, as Shulman terms them, of "bureaucrat" companies.

But he warns: "Many large bureaucratic organizations began with a great entrepreneurial founder with a vision reaching far into the future. Well-known examples include Ford Motor Company and Xerox, both of which started with dynamic, visionary entrepreneurs. Today, however, Ford and Xerox are no longer perceived as entrepreneurial. In fact, they are often depicted as the embodiment of corporate bureaucracy and competitive decay."

Interestingly, Shulman also points out that the CEOs of entrepreneurial companies such as Research in Motion (makers of the Blackberry), Google, Infosys, and Apple Computer, all earn considerably smaller salaries than other members of their senior staff and generate the bulk of their wealth through stock appreciation.

Just to underline the importance of entrepreneurial businesses, last November, a report from the Kauffman Foundation revealed the startling fact that since 1980, almost all net job creation in the US can be attributed to firms less than five years old. As the Foundation's blog put it, it seems that "the key takeaway message: size doesn't matter... age does".