Seth Klarman: Don't Forget That Stocks Are Real Businesses

Investing in a business-like manner could provide an edge

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Apr 12, 2022
  • Some investors rely on emotions, market sentiment and other unreliable inputs when apportioning capital.
  • Adopting a business-like approach may provide opportunities to capitalize on undervalued shares ahead of a likely long-term recovery.
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It is easy to forget that stocks represent pieces of real businesses. They are not merely names and numbers. They have employees, customers, products and tangible premises from which they operate.

This point has previously been highlighted by Baupost founder

Seth Klarman (Trades, Portfolio), who said, "If you can remember that stocks aren't pieces of paper that gyrate all the time -- they are fractional interests in businesses -- it all makes sense."

Investing as a businessperson

In my view, many investors fail to use a businessperson’s mindset when allocating capital to listed companies because they are detached from them. For example, if they were considering buying a company that operated locally to them and which they could see first-hand, they would likely consider it to be a business transaction. As a result, they would be more likely to conduct detailed analysis on its financial position, consider its competitive advantage versus peers and deduce whether its price represents good value for money.

However, many investors seem to forget the stock market contains real businesses. Instead of undertaking thorough due diligence on them, they invest based on all kinds of unreliable measures. For example, they may rely on stock price charts to deduce whether a company’s shares will rise or fall. Or they could listen to their peers who may have a different time horizon or risk tolerance than their own. Worse still, they may try and determine how a company will perform based on the current macroeconomic outlook.

Certainly, things such as investor sentiment and the economy’s performance matter to almost all businesses. But they cannot be predicted ahead of time and relying on them when conducting what is a business transaction, in terms of purchasing shares in a real company, may prove to be a fool’s errand.

Capitalizing on a lack of professionalism

Of course, the fact many investors do not act as businesspeople when allocating capital gives their peers a huge opportunity. Individuals who ignore their emotions, do not listen to market "noise" and pay little, if any, attention to wild share price swings can use the stock market’s high degree of volatility to their advantage.

At the present time, for example, investors who act like businesspeople may be able to purchase high-quality companies for far less than they are worth due to weak sentiment among their peers. Should the recent stock market decline persist, there may be even more opportunities to follow this path in the near future.

Clearly, the stock market could take time to recover to its previous record highs. However, it has a very strong track record of having done so, since it has recovered from every previous downturn or bear market. Investors who view their stocks as businesses are more likely to take a long-term approach than their peers. This may mean they have greater potential to benefit from a likely stock market recovery over the coming years.

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I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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