Your Investment Strategy: Own Select Businesses Not Random Stocks

In my lifetime I've had a front row seat to the democratization of financial markets. Thanks to the internet we now take it for granted that just about anyone, at just about anytime, can buy shares of stocks from their cell phone or laptop. That's quite a distance to have traveled since the days when only rich people had stock brokers who acted as the gatekeepers to financial markets. I remember clients who treated stockbrokers badly (yes, I'm old enough to have been a stockbroker) because they wanted to make their own investment decisions and thought of us an an added level of friction in placing their trades. They knew what they wanted and couldn't have cared less if the rookie stockbroker taking their order agreed with their selection. Investors are now, of course, free to make their own choices or choose to work with a professional advisor to get the level of advice that they require.

Here's an advantage that being an old timer gives me: there are certain fundamentals about investing that apply to everyone who invests, either on their own or with a professional. The universal truth I want to describe today is the difference between speculation and investing. Part of today's investment environment is the "gamification" of investing, in other words, many of us are "playing the market" instead of investing in something. Thanks to index investing and other efficient market type strategies, buying a random piece of paper (a stock certificate) and holding it until someone pays a lot more for that piece of paper is what now often passes for in depth investment research. Stocks and bonds, in this approach, are treated no differently than if someone buys collectible trading cards, fine art, or even a postage stamp collection. You buy something because you hope it is going higher, and there is nothing wrong with that... As long as you guess right. 

However, stocks offer us an alternative method of valuation that is championed by the likes of Warren Buffett and involves less guess work; when we buy stock in a company we buy shares of a business. Yes, of course we are buying a stock that we hope to sell at a higher price but: when we buy businesses instead of stocks, we are often more willing to take a long term view of the company and make our buy and sell decisions based on the business outlook for the company instead of simply hoping the price movement of the stock moves in our favor. Having a fundamental, underlying view of the business allows us to assign valuation to a stock and overlook the short term view of the often crazy day to day movements of the financial markets. Having an understanding of the valuation of a business, its management, its competitors, its growth rate and its expected earnings allows us to put stock price in a context that makes our decision less emotional.

Before I invest in any individual company or sector of the market, I ask myself, do I want to go into this business? Is it a good, profitable business to be in? What are the future prospects? Is management up to the challenge? Is the stock trading at a reasonable valuation? Would I be happy owning this business for a very long time? In my mind, asking these questions (and many more) is the difference between investing and speculating.

Considering yourself as not only a shareholder, but a business owner, makes market volatility easier to handle. If you own a good company that goes down in price because of market conditions, you welcome the downturn to perhaps buy more stock and add to your position. (Of course, if a company has its own issues and goes down for its own reasons, you might need to sell- move on, you bought it because it was supposed to go higher- let's say they have an accounting scandal: adios! No one says you have to own them forever!) In general, viewing your ownership in a company as what it actually is (equity) allows you to be a more patient shareholder who believes that in time the value that you perceive in a company will be realized by the market and you can be patient while it gets there. AND: you can become less nervous with a profit and sell when you have a winner: professionals keep their winners when fundamental valuation tells them to.

Market volatility is part of investing, one of my colleagues is fond of saying, "They go up and down," and being able to put market volatility in context by understanding the businesses that you own gives you many more long term options than simply trying to out guess the professional institutional traders on Wall Street. In general, if you buy good businesses at a good price, you will do just fine overtime. Just Google Warren Buffett for proof!

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. ​All investing involves risk including loss of principal. No strategy assures success or protects against loss.