Successful investing, like everything in life, requires the right approach. Such an approach isn’t just a to-do list, but a way of thinking. The wrong way of thinking leads one to easily stray from the correct path, whereas the right way leads one to successfully stay on track.
Weight loss programs are a great example. If your weight loss plan is a crash diet with no thought for what happens after, you’re very likely to fail long term. If your approach is to implement a permanent lifestyle change that includes diet and exercise, then you can and likely will succeed. The thinking behind the approach is vital to success.
Nowhere is right thinking more lost than on investors. Instead of thinking of stocks as partial ownership in businesses, they think of stocks as mere pieces of paper trading in a highly abstract “casino” somewhere in New York. And that’s why most generate lousy results.
Santa Cutie, there’s one thing I really do need, the deed; To a platinum mine – J. Javits and P. Springer, Santa Baby, originally sung by Ertha Kitt
A stock certificate is partial ownership in a business. You don’t own a piece of paper, but the underlying business. Ertha Kitt is not excited about a piece of paper called a deed, or even what some other person is willing to pay for that deed on any given day, but for the platinum in the mine and what it’s worth in the real world.
Let me give an example to make this even more concrete. If you have $20,000, and find four other friends with $20,000, you can buy a $100,000 house together. If that house rents for $1,000 per month, then you’ll generate $12,000 a year of revenue. If you have $2,000 of costs each year for real estate taxes, upkeep and management, then the house has net income of $10,000 per year. That’s a 10% yield for each partial owner ($10,000 net income/$100,000 investment = 10%; $2,000/$20,000 = 10% for each of the five owners).
The deed to the home, or the partial deed specifying that you own 1/5 of the home, is a piece of paper. But, what you actually own is 1/5 of the home and 1/5 of the income.
Now, suppose some bone-head comes along and offers $50,000 for the home you paid $100,000. You and the other 4 owners are free to send him packing. His offer is no sweat off your brow, because you have partial ownership in a stream of income–specifically: $2,000 for the $20,000 investment you made.
The offer of $50,000 is no obligation for you. You need not lose sleep at night or panic that such an offer is made. You can check to make sure the home is still rented, count your annual cash intake, double check the expenses, and go about your merry way thinking very little about Mr. Bone-head.
This is the same attitude investors should have.
Instead of freaking out when the deed to their partial ownership drops 50%, they should check to make sure the business isn’t going under and can still generate profits long term, but then go about their merry way. There’s no need to panic if your partial ownership is generating 10% on original investment. There’s no need to lose sleep when you own a business with profits and assets. But, it’s very easy to lose sleep when you think you own of a piece of paper in some vault in New York and people are offering 50% less than what you paid.
Right thinking here is crucial. If you know nothing about the profits of the enterprise, you’re likely to panic. If you think of the deed as a piece of paper or symbol on a computer screen, you’ll probably panic. If you think about the underlying business, you can remain calm. In fact, you may even realize that a 50% drop means your 10% yield has become a 20% yield to the Mr. Bone-heads of the world and buy more partial ownership from them.
Most people lose their shirts investing because they panic and sell when Mr. Bone-head offers 50% off their original investment. Sometimes businesses really do go under, but it’s much more rare than market panics. On extremely rare occasions, countries and stock markets completely collapse and people lose everything. The vast majority of the time, though, investors get lousy returns because they buy after things go up and then panic and sell when things go down. They buy and sell like that because they are focused on stock symbols instead of businesses.
Stocks are not mere pieces of paper, but ownership in businesses. Thinking of them as such can lead to success. Thinking of them as blips on a screen is doomed to failure.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.