Introduction to Investing: Article #3
In our previous articles, we discussed 1) how wealth is created and 2) why we believe the best way to create wealth is through investing in the stock exchange for the long term.
Now it is time to discuss how to invest!
Many view investing in the stock market as gambling and success as pure luck while others believe only the smartest can consistently make a living from it. While some are essentially gambling although they don’t believe they are, and some of the world’s top minds are applying their genius in an attempt to beat the market, we don’t believe either approach is necessary for success, and one should not be intimidated. Our view of investing is simple, and intentionally so.
What is investing?
When you buy a share in a listed company, you become part-owner of that business. Before digitisation, you would receive an actual physical share certificate proving you own part of that business. Today you still receive the certificate but it sits with the custodian in a digitised format so it is unlikely you will ever see it but you are still part-owner nonetheless. Sure you might not have a lot of say in the day-to-day operations of the business but do you want to! We would rather leave that to someone more capable.
By buying just one share of a listed company you become a part-owner of that business.
If by investing you become part-owner of a business then just like any business you benefit when that company makes money and are hurt when the company fails. So naturally, you want to invest in a good company.
Finding a good business
We argue that most people already know how to invest. For example, let us assume you are offered the opportunity to buy into a business in your local town, city, suburb, or wherever. To be able to assess your interest in buying into that business is a relatively simple process. You would want to know the following:
What does the company do?
Is there a demand for such a product/service?
How much money does it make? (You’ll be surprised how many people ignore this!)
Who currently owns this business, and why are they selling?
Who manages the business, and are they any good at it?
Who else in the area is providing a similar product/service, and are they better at it?
There may be other questions you want to ask to determine your interest but once you have systematically worked your way through them you will inevitably be able to ask the most obvious question.
The answer to this question will have the biggest influence on your decision to ultimately buy the company or not. If the price is too high you will simply tell the seller to take a hike. If you perceive the price to be fair you might then have to weigh up the odds of being able to sell it at a better price down the road plus you must consider other opportunities you are passing on. If, however, the selling price is so attractive to the point you cannot resist you will more than likely be willing to invest. It’s obvious right!
This is the exact approach we take when it comes to buying and selling businesses on the stock exchange. We ask ourselves the same questions as you would. Given our years of experience, we know the right questions to ask and we know how to find the answers.
To improve our rate of success we adhere to a series of principles:
Invest in the highest quality businesses
Invest in healthy businesses
Invest in businesses run by capable, honest managers preferably with their own skin in the game
Invest at a substantial discount to the business’s true value
Our view of investing may seem simple because it is.
The hard work comes in seeking out high-quality businesses, sticking to your process, and investing only when you find something truly worth owning. It takes time, it takes experience but most of all it takes discipline and patience to be successful.