Investing Means Owning Businesses

If the mechanics of actual trading mean little, what does matter? Do charts of stock prices hold the answers? We've said it once, and we'll say it again and again: When you buy stocks, you are buying ownership interests in companies. Stocks are not just pieces of paper to be traded.

Think like a business owner

So if you are buying businesses, it makes sense to think like a business owner. This means learning how to read financial statements, considering how companies actually make money, spotting trends, and figuring out which businesses have the best competitive positions. It also means coming up with appropriate prices to pay for the businesses you want to buy. Notice that none of this requires lightning-fast reflexes!

You should also buy stocks like you would any other large purchase: with lots of research, care, and the intention to hold as long as it makes sense. Some people will spend an entire weekend driving around to different stores to save $60 on a television, but they put hardly any thought into the thousands of dollars they could create for themselves by purchasing the right stocks (or avoiding the wrong ones). Again, investing is an intellectual exercise, but one that can have a large payoff.

You buy stocks, not the market

We've all seen the prognosticators on television, predicting where the market is going to go in the future. One thing to remember when listening to these market premonitions is that stock investing is about buying individual stocks, not the market as a whole. If you pick the right stocks, you can make money no matter what the broader market does.

Beware the market predictions

Another reason to heavily discount what the prognosticators say is that correctly predicting market movements is nearly impossible. No one has done it consistently and accurately. There are simply too many moving parts, and too many unknowns. By limiting the field to individual businesses of interest, you can focus on what you can actually own while dramatically cutting down on the unknowns. You can save a lot of energy by simply tuning out market predictions.

Stocks are volatile. Why is that? Does the value of any given business really change up to 50% year-to-year? (Imagine the chaos if the value of our homes changed this much!) The fact is, "Mr. Market" tends to be a bit of an extremist in the short term, over-reacting to both good and bad news. This is a good fact to know when starting.