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When it comes to investing in the stock market there are a lot of reasons why people get it wrong and never quite find themselves investing successfully. One key reason, though, is that when people are investing in the stock market they are investing in a stock.
You heard me correctly here. I made no misstep. When you invest in the stock market the last thing you want to consider is the stock itself.
Don't get me wrong. The share price does have its place in the overall scheme of things. After all, it is the current value assessment or selling price. But it is not the value as a whole of what it is you are actually buying.
On a day-to-day basis, and even an hour-to-hour basis, a stock price is going to move up and it is going to move down. These interim movements are not a reflection of a direct change in underlying value, but simply a reflection on current market sentiment from one minute to the next or one day to the next. Ultimately these movements have no relative bearing on what the stock is actually worth.
Because again, the stock does not matter. It is simply a unit of measure and nothing more. It is the current market cap divided by the number of outstanding shares in the marketplace.
All these movements in share price do is offer you moments to play and moments to sit and wait.
Because what you are actually invested in is a business. A company. And it is going to have its true value determined by all the things that it does as a business to be profitable, to have an edge and to have the ability to stand out taller against its competition.
That is what you are investing in. The business itself.
I want you to think about something that happens often in the business world. A guy comes along and has an interest in XYZ Company selling for $22 per share in the stock market. He goes to the board and provides them with a tender offer to buy the company outright at $32 per share, an obvious $10 premium to the current trading value of the stock.
Why would he offer a premium for a stock he could buy for $10 less? Because he is not buying the stock. He is buying the company. He is buying the business. He is buying the value of the company.
The stock price does not matter.
When it comes to a lot of "investors," many fancy things get played around with. People use charts to try to determine trends and directions. Entry points and exit points. Support levels and resistance levels.
They really don't have any interest in the company. They only have interest in the stock.
When a guy comes to the table and offers $10 more than the stock price to buy the company, he has looked at any number of things. Things that matter. Things that are important to the future of the business.
Instead of looking at charts and other measures, he has looked at balance sheets, 10-K's, debt to income, operating margins and any number of other things important to the business.
These are all things that should be important to an investor even if he is not providing a tender offer to buy the company outright but only has interest in buying one share or two shares or three million shares.
What is the company worth tomorrow? Forget about today. Again, you are buying the business. Not the stock.
What you want to look for are companies that have a strong connection with their customers. A strong product line that people identify with, that offer value to consumers, that enhance their lives and provide something that has lasting value. Something that has brand recognition and a proven track record of success. Something that can stand the test of time and that is viable and useful in an "evergreen" way.
This is actually a tenet of value investing.
Hey, the latest fitness watch is a great thing. But is it really a solid business? No. Now, take something like Coca-Cola. Is it a solid business that is evergreen and can stand the test of time?
Now take energy drinks. Is this a lasting business that will stand the test of time? No. It is like the fitness watch. It is trendy and profitable today, but 100 years from now no one is going to be drinking them.
The bottom line here is that if you want to invest successfully you have to remove yourself mentally from the stock. It's just numbers. If you want to invest in a business, then you have all of the tools you need to determine the true future value of said business. And that's all you need.
Just like the investor who comes into the board room with an offer of $10 a share more than the current stock price knows what the true value of the business is, the stock price offers you one thing and one thing only.
The opportunity to know if the price you are paying for the business today for future value tomorrow is the price paid.
If you really get down to things, if you think about it, if you are evaluating businesses over stocks, do you really need all of the charts and other "analysis" to determine whether or not your investment is solid?
What is a chart going to tell you about Coca-Cola, for example? When you look at any company that has succeeded throughout generations, for 50 years or 100 years or longer what is the only thing you need to look at?
What did it do? What gave it its lasting power? What makes it evergreen? What makes its products something that is not trendy, but something that has staying power for consumers? What is it about the product it sells that has sold for 100 years that will still sell 100 years from now?
What is it that separates a Slinky from a Cabbage Patch Kid? What makes Monopoly a board game that continues to be played with? What forever separated Ford and General Motors and Chrysler from Packard and Studebaker and AMC? What is it about McDonald's that 82 years later people are still eating their hamburgers over any other hamburger chain and why will people still likely be eating their hamburgers 82 years from now?
These are the things you need to know. These are the questions you need to answer. These are the things that are important to mark whether or not your investment has merit. Whether or not it will be successful. Whether or not the investment you make in the business matters.
If you rely on investing in stocks, too many things come and go. The great Sears and Roebuck Company, Blockbuster Video, Eastman Kodak and any number of past relics.
Invest in the businesses and the entire landscape of investing and actually making money is forever changed. And knowing why some businesses succeed and why some fail is also vital to your success.
There actually is a reason we still play with a Slinky and only talk about a Cabbage Patch Kid.