The high priest of value
investing himself, Benjamin Graham, taught us that, “investing
is most successful when it is most business like.” That makes sense
because investing in stocks is, quite literally, the act of buying an ownership
stake in businesses. Whether you own 100% of the shares of a local
jewelry store in your hometown, or 1,000/4,405,893,150th of The Coca-Cola
Company based on its total shares outstanding in the last 10-K filing,
the end result is much the same: There are only three ways
you can make money from your stock.
This simple distinction makes it easier to spot flaws in an investment
portfolio because it changes your behavior. You suddenly demand a
margin of safety in your purchases because you expect to be
compensated for the different
types of risk to which you are exposing yourself and your family.
You require evidence based on facts rather than hope for high growth
assumption rather than getting swept away in the euphoria of crowds.
During stock market crashes, you can remain rational and buy ownership
positions in quality companies at bargain prices despite everyone else rushing
for the exit in panic. You seek to understand things such as how the
firm generations its underlying cash flow, what types of assets makeup
the balance sheet,
and whether management is following capital allocation and dividend
policies that are friendly to you and other owners.If you don't currently treat your stocks like this, I urge you consider a paradigm shift. On my personal blog, I've spent the past few years driving home the concept by running case studies of stocks as viewed through the lens of business-like investing; looking at the long-term results generated by holding ownership stakes in businesses as diverse as Chevron General Mills, McDonald's, Clorox, Hershey's, Nestle, Colgate-Palmolive, Procter & Gamble, Coca-Cola, Tiffany & Company, and the now-bankrupt Eastman Kodak.
