Buy Companies, not Shares

What’s up with the investment market? Stocks are falling since weeks. They are as unpopular as they haven’t been for a long time. Volatility seems to become normal. It’s hard for the average investor to sail through these rough waters.

After these many years of a bull market, nobody knows where the financial markets will go with the companies in the near future. Is it really the beginning of a longer bear market or is it just a dent? Does this matter for you? Sure, most of our portfolios have lost market value during the last weeks. And for many, these losses hurt a lot. But why? Well, I think, it‘s a problem of how they look at shares, the market and the losses.

Psychology companies
A bet on Psychology

In my opinion, one of the main problems why people struggle with losses of market value is that they have a wrong view on what shares really are. They see them as just a piece of paper. When they buy stocks, they hope they can sell this paper at a higher price in the near future than they bought it. Those people bet on the psychology of the market participants and they hope that this psychology will go on to be greedy and push the share prices up. But when this psychology got worse, those investors have a big problem. They start to lose their bet. So what can you do to prevent yourself against this?

Share companies
What‘s a Share?

First of all, one has to look at shares as what they really are. This may seem obvious and easy, but it isn‘t. If it would, less people would make this mistake. Although many market participants see shares as just a piece of paper that is traded every second on the market, for the intelligent investor a share is more than that. For this investor a share is participation in the success and the return of a company. Intelligent investors always see the company behind the shares and they invest in that company through the shares and not in the shares alone. So the share is nothing but a small piece of the company. And that‘s great, because most of us aren‘t able to own a hole company. But with shares, we‘re able to own a small piece of it. And that‘s exactly what we want.

A Share is the Company itself

As a little piece of the „company“ cake the share is treated just like the hole cake. It carries a portion of the assets and the valuables and it receives a portion of the profit. As a shareholder you receive this profit as dividends or a reinvestment in the company. In a company, in which people are working and producing products or offering services or both. This work of that people is it what makes the value of a company and the therefore the value of its shares. So, if you want to invest successsfully over the long haul and get through rough times also, you have to look at the value of the real company and not at the market value.

Market Value

Market value only says something about the price people are momentarily willing to pay for a company. This will and this price are psychological driven and are mostly based on an anticipated future market value which depends on greed and fear. The market value is seldom based on the real value of the company behind the shares. And that‘s great, because it offers the intelligent investor many opportunities to make money and build his fortune. The intelligent investor tries not be influenced by the psychology. Instead, he tries to participate in it. He knows that what really matters is the value of the company. And he‘s after that value. And the price or the market value serves him as an indicator for getting the company value at a discount or a premium.

Real Value

The intelligent investor is happy about falling prices and market values. Not because he likes the value of his company decrease. On contrary. He knows that‘s not the value that is falling but only the price. He knows about the difference between those two. As Warren Buffett likes to say, „Price is what you pay, value is what you get“.

So, because the intelligent investor is someone who has long term orientation the short term market value isn‘t of special interest for him. He‘s is more interested in theology term value of the company. That value depends on the success of the company and not on the daily share prices. Don‘t forget, over the long run, market prices reflects the value of a company. But short term, they‘re an expression of the psychology of the market participants.

Friends companies
Falling markets are investors friend

If you‘re an investor and not a speculator, you love times like these when the market‘s falling. Especially when the market is as expensive as it got since 2008. As I wrote in my last article, investor‘s time is coming now. At least, I hope so. Many of the companies I would like to own – or a piece of them – were too expensive to buy. I don‘t like to buy without a discount or a reasonable margin of safety. So, during the last year, it was difficult to find great companies at a reasonable price to buy. But now, when the prices are falling, chancing are good, that all those great companies become available at a price I‘m willing to pay.

If you sit on cash waiting to invest it reasonable, times seem to become in your favor. Companies get cheaper and the relation between price and value become more reasonable. That‘s what we‘re looking for when we regard market prices. We are only interested in them to find out what we have to pay for the value of the company we like to own. And for sure, we want to pay as less as possible.

What to do now?

So don‘t be afraid when the market price of your shares is falling. As long as you won‘t sell them, the price is irrelevant. And it doesn‘t say anything about the value of the company. Focus on that value and not on the price. The inner value of the company still remains even if the market value declines. If you have cash and want to buy, be cautious and wait until the odds are in your favor. If you haven‘t any cash, so what. Let your portfolio alone and wait, too. There is nothing to do for you. As long as you have great companies with great value in your portfolio. If you have companies with less value, you made a mistake when buying. But that‘s another story.

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  1. Julieta says:

    Thank you for the great article

  2. Elsie Chadek says:

    very well my brother

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