Now most of people know who Warren Buffett is. However, few really believed that a share holder of a public company is practically a business owner. To many people, including entrepreneurs and financial professionals, shares are papers exchangeable for cash. They buy shares simply for the hope of selling it at higher prices later. That’s why when people talk about shares they often raise questions like these:
Why do you think the price will go up (or down) for XYZ stock?
Is this the bottom of the market now?
Has ABC industry a good prospect in near future?
Shall I sell the shares of XYZ Company, when its share price goes down more than 8%?
Will there be a bull (or bear) market in the later half of the year?
All these questions are sensible ones on making money. Well, aren’t we talking about making money here? Yes, of course! However, what’s in these people’s mind is cash，nothing else but cash, and the stock market is a place where you bid with your cash for a good return later. The value behind the shares of a company seldom, if ever, comes to their mind. It’s a surprise to me that even most of entrepreneurs also think the same way.
The key issue here is not that people doesn’t understand the values of shares representing. They know more or less about value behind the shares after their hearing about Warren Buffett and his value investing, but choose to overlook it. Why? The mentality is that if one is not the biggest share holder of a company (or at least have a strong position to influence the management of the company), one is not the business owner, and therefore, no matter how many shares one holds, one is only a share holder(paper holder), not a business owner. Without the ownership mentality, these share holders only see shares as paper certificates, not assets with its unique value.
This is really beyond my keen! On one hand, many people think an owner of a flat in a large apartment building as a serious property owner, although the guy doesn’t own the one whole flour or the whole building. On the other hand, a share holder owning a fraction of a very good business is not considered as the owner of the business. Well, I guess the following is the reason behind this reasoning:
First, as a small share holder, he may not have a say on or know thoroughly about the business, while as a flat owner he can do whatever he wants to the flat and know every single thing inside. Secondary, a flat may not disappear over night unless there is a natural disaster, while a company may go bankrupts anytime in theory.
For the first point, I totally agree that you have to know what’s happening to the business to have a feeling of an owner. But there is a difference between knowing the business in the big picture and knowing all the details of the business operation. I bet that most of the CEOs of public listed companies don’t know all the details of their business operation. If they do know, they are not good CEOs. For the big picture of a business, the information is everywhere for listed companies. You can draw a very good picture of a business based on the financial data, the products or services the company is offering, the past performance and the management. Different investors may reach very different conclusions based on the same set of information. It’s all depending on one’s ability of analysis and visualizing the future of the business. I don’t think great investors like Benjamin Grahams, Warren Buffett or Peter Lynch had insider information every time they made an investment decision.
I don’t agree that you have to have a say as a business owner. Warren Buffett always let the old management team manage the business after his acquisition. He did not involve in the day to day operation of the business he acquired, not even on the strategy. All he did is the allocation of the capital of the business. It’s again only from an investor’s points of view. To most of people, managing a company is not fun, especially on day to day operation and managing people. Unless you do have a talent to change the world and the charisma to attract and persuade talented people to work with you like Steve Jobs, managing a company can be exhausting and tedious. It’s much better to leave the job to the managers who are good at and enjoy your life as an owner. Warren Buffett has this wisdom.
For the second point, I think a strong company will grow stronger and gain market share at weaker companies’ expenses in the same sector during difficult economic period. A good business with reputable brand, high barrier of entry, strong management and some degree of monopoly power in its sector will grow value for its owner much faster than any real estate property. Apple, Coach, Wal-Mart are all good examples.
So long you know well the company you own, you can be a very happy passive business owner (vs a share holder&trader) by holding a fraction of shares of a good company. It’s even better than the biggest share holder of the company, who has to shoulder the likely responsibility of setting the strategic direction or choosing the right CEO for the company. Every time I go into a Coach store, I enjoyed the products and ambience in the store as an owner. Knowing it will make profit constantly for me worldwide in years to come even as I am on holiday or watching a show, or sleeping, I am a happy man. The only thing I worry about Coach is that it becomes too popular to keep its status as a luxury brand. Yes, I only own a small fraction of the company. So what! No matter how wealthy a man is, he can only enjoy a fraction of all the wonderful things in this world in his life time