Friday, 26 July 2013

If you are going to invest, WHY should you think like a business owner?

“An investment in knowledge pays the best interest.” – Benjamin Franklin
It is often difficult to explain many of the mechanics which go into the investment process.

Keep at the core of your investment philosophy this fundamental premise, "Know what you own and why you own it."

This provides an investor a level of greater clarity over many investors who do not subscribe to this core premise.

If you are going to invest, WHY should you think like a business owner?

Owners of businesses have great knowledge of what they own and why they own it, including a long-term time horizon - typically three years or longer.

As an investor, this means you should at least have the ability to know what you own and why you own it if you choose a particular company.

Why is it important to know what you own and why you own it?

1.  Business owners are used to the ups and downs of their business.  Economies expand and contract over time.  However, well-run companies with great products and services will continue to grow over time.

2.  When a business owner's business goes through a downturn, do they sell their business and hope to buy it back at a cheaper price down the road?  Of course not!  Rather, in difficult times, they continue to invest in their business for future growth - a tactic of a long-term thinker!

What is commonly observed when markets are in a short-term correction or economies are in a period of contraction?  

Many investors have a tendency to become emotionally connected to the short-term noise. 

1.  Many investors revert to attempting to time the market by selling their investments with the hope of buying them back at cheaper price.

2.  Other investors give up on investing in the stock market indefinitely.

3.  Other investors move their investments to another investment manager who's historical returns give the investor a sense of comfort they will achieve similar success in the future.

All three scenarios are unfortunate. 

1.  As statistics and history have clearly taught us, investors who attempt to "time the market" routinely under-perform "the market."

2.  Investors who pull out of the equities markets risk missing out on great investment opportunities for the longer term, effectively choosing to hold cash instead.

3.  Investors who chase historical returns have been left with the disappointment that the future returns they achieved did not meet the expectations of the investor.

The important message here is, the more you know about what you own and why, the less likely you will be to get emotionally attached to short-term noise or stock market corrections.  Instead, as an investor who knows what you own and why, you will look at the stock market corrections and economic slowdowns as opportunities to buy businesses on sale - to strategically cost average into the companies you want to buy.  This is similar to how a business owner behaves.

Are you going to invest like a business owner (a proven, long-term strategy to wealth creation for many people)?

Or, are you going to be someone who "guesses" at what is going to happen because you do not have the clarity of knowing what you own and why you own it?

Remember, owning a stock is an ownership interest in a business with an underlying value that does not depend on its share price.  If you invest in a stock of a company, you are and should think like a business owner in that company.

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