Until I truly began to understood this simple yet profound idea of investing as a business, I didn’t really understand or take investing seriously. Today I do. I've come do understand and I am simultaneously an investor as well as a business owner. I am the owner of a business that employs just one person - me.
All of the collateral that was needed to start my business was provided by just one person - me. All of the profits that my business generates are distributed to just one person - me. All of the wealth that is created remains in the account but at any time that wealth can be converted to cash and distributed to the only businesses owner - me. And there’s only one person responsible for all the business decisions, both good and bad, that are made each and every day - and that’s me.
Like any business, my business owns inventory and that inventory is my portfolio. That inventory can never be thought of as good or bad, right or wrong. It’s just inventory. When I add to that inventory, I have a certain expectation of what that inventory should do. I'm also responsible to make any decisions concerning any and all changes to that inventory from time to time. I can buy and hold inventory or I can buy and sell inventory. It’s simply and completely my own decision and responsibility.
That inventory itself has an inherent or intrinsic value. I try to buy stock (inventory) when it’s way below it’s intrinsic value, hold it as long as it performs as I expect, and then sell it when it exceeds it’s intrinsic value. I have no emotional connection to that inventory and I don't define myself by that inventory. It's just the means by which I enhance my wealth.
"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 and manage your accounts correctly, then you’re not running your accounts as a business. You’re not making the necessary investing decisions as a businessman would. You're probably not analyzing your current business decisions on a daily basis to determine whether or not they are good or bad decisions. You're running your business poorly and poorly run businesses sooner or later fail. And often miserably.
So if you’re not operating your accounts like a business, what are you really doing? You're probably doing one of the following three things.
You think of yourself as the owner of a lot of great companies.
You’ve may have heard that “When you buy a share of stock in a company you're now a part owner of that company.” This may even seem to make sense in some bizarre way, but this couldn't be any farther from the truth. In fact, this is probably the biggest whopper told to shareholders by the Wall Street professionals. It’s true that if you’re rich enough and you could buy all of the available shares of a company, you would be the owner of that company. But if you’re not quite that rich and you could buy a very large portion of the outstanding shares of the company, you might be elected to the board of directors and be considered as one of the small group of individuals that own the company. But if you’re a small investor like most of us and can only buy a few hundred shares of a company, what exactly are you an owner or part owner of?
A true owner of a company directs the affairs of an organization and is responsible for it’s mistakes. Can a single shareholder do that? A part owner ends up being part of a group like the board of directors that makes group decisions on the future direction of the company. Can a single shareholder do that? What exactly does an investor who owns only a few hundred shares of a company really control or direct? Probably very little if anything other than to vote for the board of directors this year or vote for who this year’s auditors will be.
A single shareholder is simply along for the ride so that single shareholder had better be positioned for the "right ride”. His inventory had better contain those companies that match his investing strategy or he may end up on the "wrong side" of the trade.
Any single shareholder has the right to receive the same dividend as any other shareholder but that doesn’t mean he has the ability or capability to determine what that dividend will be. He has the same right to benefit from the business’s increases in revenues and earnings in terms of the company's stock appreciation, but he really doesn’t control the operation or direction of the business. He may think of himself as an owner but that kind of "ownership" is generally not much more than “in name only”.
You’re really a gambler at heart.
I like to think of this group of investors as short term traders. That’s because they usually trade for a very short time and then they're broke. They tend to lose all of their money rather quickly. The lucky ones will have their “day job” to fall back on so after a while they usually build up another “stake” and continue to gamble on the next hot tip or great idea.
Gamblers usually get their tips from all their smart friends or from those various financial websites that can be found everywhere on the internet these days. The gamblers think that although they may not have the true insider's information, they believe they have information early than others and more reliable than the typical rumor. Usually this is the furthest from the truth. Luckily for me and others, these individuals are the market's money donors. They keep the rest of the investors wealthy. I would never discourage anyone from becoming a gambler. The market needs their money.
You’re a stock chaser.
The Stock 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 amazes me and often interferes with my plans. My plan is to buy stocks that increase their revenues, earnings and dividends over time and on a consistent basis. When that stops happening, it’s time for me to find another stock that increases its revenues, earnings and dividends. The Stock Chaser always seems to come in after the stock has moved significantly up in price. When I think it’s finally time to move on to another stock, the Stock Chaser continues to drive a stock upward whose revenues, earnings, and dividends are beginning to turn decline. I need to be reminded of these guys every so often. They'll always continue to push a stock higher when it's not justified by the fundamentals.
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 their investments and take everything too personal. It’s really not personal, it’s just business. If an investor's portfolio was an actual brick and mortar business, he wouldn’t have any problem treating it and assessing it as a business. If the portfolio was rental property he wouldn’t have a problem treating it like a business and assessing a return on investment from the rental income. 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 accounts just like you would any other business. Your investments are your business. And you are their sole proprietor.