Think Like an Owner

“Unlike speculators, who think of securities as pieces of paper that you trade, value investors evaluate securities as fractional ownership of, or debt claims on, real businesses.”
–Seth Klarman

Although you may not realize it, you're probably a business owner.  No, you likely don't manage a business as your day job, but through your investments you're a fractional owner in several different businesses.  That’s because owning a share of stock is a legal ownership claim on a business (see Stocks, Bonds, & Lemonade).  So congratulations; if you own a stock, mutual fund, or ETF, you're a business owner!

Since you’re technically a business owner, it makes sense to think like one when managing your investments.  Here are a few ways that you can be a better investor by thinking like a business owner.

Do Your Homework

Everybody loves homework, right?  Thinking like an owner means that before purchasing shares of stock, you want to do your homework to learn everything you can about the business.  

If a local entrepreneur came to you and asked for a $1,000 investment for a small ownership share in her business, what would you want to know?  

Here are some things you may consider: who are her customers, how do they pay, what are her margins, how fast can she grow, who are her main competitors, who are her main suppliers, how much more money will she need to grow, etc.

These are the same types of things investors should consider when researching a business (stock).

Once you have all this information, you can use it to make informed assumptions about the future.  These assumptions can help determine what a share of stock in the business is worth today.  If you can go buy the stock at a price below what you’ve determined it’s worth (with a reasonable “margin of safety”), it’s probably a good investment.

It’s important to stop right here and note that investing is always about the future (the value of an asset is the present value of all future cash flows).  Therefore, investing always involves uncertainty.  We know that we’ll never be 100% correct; in fact, we know we’ll be dead wrong at times.  But having a built-in “margin of safety” can help when things don’t work out as expected.

Play the Long Game

If you invest with the mindset of a business owner, you’re investing for the long-term.  Warren Buffett was once asked what he considers an ideal holding period for a stock.  His answer?  Forever.

Wall Street is known for it’s excessive focus on short-term profits.  But business owners focus on the long-term.  An owner doesn’t abandon his business because of cyclicality or a few bad quarters.  In fact, a good business owner will look for opportunity during lean times, and as an investor, that’s exactly what you should be doing.

Step Away from the Roller Coaster

Investing like an owner means essentially ignoring the stock market roller coaster (and the media attention it garners).  Stock price fluctuations don’t have much meaning in the short run.  Business owners care much more about the quality and value of their businesses, rather than the quoted stock price.

Benjamin Graham, the father of value investing, says it best:

“Basically, (stock) price fluctuations have only one significant meaning for the true investor.  They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.  At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.”

Parting Thought

Being a good investor requires some knowledge, a lot of work, and even more patience.  Thinking like an owner should help.  

Ben Malick, CFA, CKA