Nearly a century ago, Benjamin Graham developed the concept of the value investing strategy that we know so well today.
Graham did far more than build a investment strategy around the idea of buying stocks cheaply. He also developed the idea of fundamental analysis and viewing a stock as a piece of a business rather than a gambling chip to be traded on a screen.
These ideas remain relevant to this day. However, many investors overlook this fundamental principle of the stock market.
The stocks vs. the businesses
To this day, many investors overlook the fact that a stock is a piece of a business. The meaning of this is far more profound than it first appears.
Investors and business owners are often described as two different types of people. That is not strictly the case. A business owner knows and understands how to operate their business, the day-to-day activities required, signs of failure and signs of success. They know this because they are doing it every single day. On the other hand, an investor who has no business interests does not have these insights.
A business owner who's also an investor has the advantage in this case. They can use the experiences they've learned in their operations to review potential investments. They may uncover issues that an investor without business knowledge would never see.
To put it another way, the experience of being a business owner may better prepare someone to become an investor. One part of successful investing that may not be apparent to a casual investor, but will be evident to a business owner, is time. It takes time and money to build a business, as well as blood, sweat and tears. Most operations will fail in their early stages. The number of successful entrepreneurs who have knocked it out of the park on the first strike is minuscule. Some had to try again and again before they eventually struck gold. The persistence paid off, but if you've never been in this position, it isn't easy to understand the time, effort, patience and drive it takes to succeed.
This is the biggest advantage business owners have over other investors. They can look past the near term challenges a company may be facing and focus on its long-term potential.
Many investors may not be able to do this purely because they have not been in the same position. It is easier to look past the near-term challenges a company may be facing and focus on its strengths or weaknesses when you've been in the same position yourself. The size of the enterprise might be significantly larger than your own business, but many common problems emerge in the business world which do not discriminate between size.
For example, every organization will likely have to deal with funding issues and customer engagement. No company in the world can get away with mistreating customers forever. Further, no company can destroy its balance sheet without having to worry about the consequences.
Business owners (wise ones, at least) know that it takes time to build a business and generate profits. Investors may not have the same perspective. Some of the most successful companies on the market today have taken decades to develop. Most products have incredibly long lifespans. In the pharmaceutical sector, for example, it can be decades before a product comes to market. It can be the same in the real estate sector. It can be years before a project gets off the ground, and several more years before profits are realized.
These are all the advantages business owners have over other investors. So, if you are looking for a way to improve your investment process, starting your own business could be one option.
Disclosure: The author owns no share mentioned.
Read more here:
- Why Warren Buffett Likes the 'Predictable' Earnings of Utilities
- Why Does Warren Buffett Like Bank of America?
- Berkshire Hathaway's GEICO Sees Customer Numbers Surge in 2020
Not a Premium Member of GuruFocus? Sign up for afree 7-day trial here.