"The chief business of the American people is business. They are profoundly concerned with producing, buying, selling, investing and prospering in the world."
If you don’t understand these ideas, then you’re not running your portfolio as a business. You’re not analyzing your current business decisions on a daily basis to determine whether or not they are good or bad decisions for your business. And badly run businesses often fail. Miserably.
So if you’re not operating like a business, what are you really doing?
You’re an Owner of Other Companies.
You’ve often heard that “When you buy a share of stock in a company you are now a part owner of that company.” Wow. This is probably the biggest whopper ever told to shareholders by the Wall Street professionals. It’s true that if you’re rich and you buy all of the shares of a company, you become the sole owner of that company. If you’re not so rich and you buy a large share of the outstanding stock of a company, you may be on the board of directors and consulted every once in a while. You may even be considered a part owner of that company by management. But if you’re only buying 1/100th of 1% of a company, what exactly are you a part owner of?
A true owner of a company directs the affairs of an organization and is responsible for it’s mistakes. Can a shareholder do that? A part owner ends up being part of a group like the board of directors that makes group decisions on the direction of the company. Can a shareholder do that? What exactly does an owner of a few hundred shares of a company really control or direct? Probably very little if anything other than voting on the board of directors and who this year’s auditors will be.
A shareholder is only along for the ride so a shareholder needs to be on the right “ride”. Your inventory had better contain companies that match your investing plan. A single shareholder has the right to receive the same dividend as any other shareholder but he doesn’t determine what that dividend will be. He has the same right to benefit from the business’s increase in revenues and earnings in terms of stock appreciation but he really doesn’t control the operation or direction of the business. He may think of himself as an owner but it’s generally not much more than “in name only”.
You’re a Gambler.
I usually think of these investors as short term traders. That’s because they usually trade for a very short time and then they lose all their money. The lucky ones still have their “day job” so they can probably build up another “stake” to gamble on the next hot tip or great idea. Gamblers usually get their tips from all their smart friends or from hot news sites. They may not think they have insider information but they think they have information early and reliable. Usually that’s the furthest from the truth. Luckily for me these are the money donors that keep the rest of us growing. I would never discourage anyone from becoming a gambler because the market needs their money.
You’re a Chaser.
The Chaser is the guy that’s found a stock that’s already gone up. Usually way up. He’s sometimes referred to as the momentum investor. This is the guy that always confuses me. My plan is to buy stocks that increase their revenues, earnings and dividends on a consistent basis. When that stops happening, it’s time for me to find another stock that can increase revenues, earnings and dividends. The Chaser, however, seems to come in after the stock has already significantly moved up in price. So when I think it’s finally time to move on to another improving stock, the Chaser fools me and continues to drive stocks upward that have revenues, earnings, and dividends that are beginning to turn flat or decline. I always forget to remember that the Chaser will continue to drive up stocks even after it’s no longer warranted. I need to remember these guys more. The number of Chasers will always run out and the stock will eventually fall. It turns Chasers into complainers.
The individual investor is really a self employed businessman who buys, holds, and sometimes sells shares of stock in other companies. An individual investor is someone who buys shares of a company that entitles the investor to an equal dividend with every other shareholder and an equal appreciation of the value of that stock certificate. As an individual investor responsible for directing his own portfolio, he needs to run his portfolio like a business. As the sole owner and manager of his business he’s responsible for the direction of his own investments. An individual investor can invest in any stock he choses so it’s critical to chose a stock that meets his own investing plan (which means if you don’t have a plan, you don’t know how to direct yourself as a business!).
An individual should be looking at his portfolio as his inventory. An inventory that can and should increase solely on the improving dividends it receives from the stock certificates it has on hand. It should also increase in value as the companies it represents increase in value. It’s absolutely necessary that if the individual investor is to succeed as a business, he needs the value of his holdings or inventory to increase over time. An individual investor needs to understand his own return on investment on his own business.
I don’t know why investing is so hard for most people. I suspect it’s because they get way too close to their investments. They internalize them and take everything personal. It’s not personal, it’s business. If the portfolio was an actual brick and mortar business, an investor wouldn’t have any problem treating it and assessing it like a business. If the portfolio was rental property you wouldn’t have a problem treating it like a business and assessing a return on investment from your rents. I’ve never been able to understand why investing in the stock of companies is any different.
If you want to be successful as an individual investor you need to run your portfolio just like you would any other business because your investments are your business. They are the company that could be referred to as “YOU Inc.”