Buy a business not a share

Lessons in Creating a Share Investment Portfolio: Buy A Company, Not A Share

“Just as it would be foolish to focus unduly on short-term prospects when acquiring an entire company, we think it equally unsound to become mesmerized by prospective near term earning or recent trends in earnings when purchasing small pieces of a company; i.e. marketable common stocks”

Warren Buffett (who else?), Letter to Berkshire Hathaway shareholders, March 1978

I’ve been interested in share investment since the late 1990s, I’ve spent 12 years working for an investment bank (albeit on the debt side of the business), I’ve owned trackers, managed funds and individual shares. But I’m not sure I’ve ever really thought about shares in the way described in Buffett’s quote above.

Clearly, on a technical level, I realised pretty early on that a share represented exactly that – a small part of a company. I even grasped that the performance of the company was linked to the value of the share.

However, like many (most?) people I was distracted by the noise. The market.

“What is the market doing?”

“I’m sorry, the market is doing nothing. It is simply being. It is being a market.”

Said no one.

I was swayed by immediate, short-term views of parties who were motivated by interests opposed to my own (the media, market commentators, message boards).

But reading the quote above, and other related Buffett-isms has had a profound effect on me.

I want to own a portfolio of businesses. I want those businesses to be well run by managers I can trust. I want them to be profitable and growing. I want the managers in charge of my businesses to be skilled at deploying capital in order to achieve a good return without taking excessive risk. I want my companies to act responsibly and ethically.

Unlike Buffett, I cannot afford to purchase a company.

Instead I’m going to purchase parts of companies. Earth-dwellers call these parts of companies, variously, shares, stocks, equities, valeurs mobilières.

The market is important, obviously. As are share prices. But only in helping me determine whether I’m happy to purchase the company, and its future prospects, for the price that is currently offered.

Once I’ve purchased my company (or my share of it), provided I am happy to own it for the long term (why else have I just bought it?), then I care not where the price is today, last year, next month*.

* Unless the ‘market’ generously decides to put my favourite companies on sale, in which case perhaps I can afford to buy more.

So, from now on, I’m going to concentrate on the company behind the share, the performance rather than the puff, the progress rather than the hysteria. That way the route towards riches investment returns lives.

We’ll see. The best laid plans of mice and men and all that kerfuffle….

Photo Credit: Dave Dugdale via Compfight cc

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