“The stock market is a giant distraction from the business of investing.”
I spotted this brilliant insight from US investor Jack Bogle in a recent edition of MoneyWeek. And how true it is! Although the stock market is not quite the bear pit that it is sometimes depicted as, it is nonetheless full of Shakespeare’s “sound and fury”.
News comes out continuously. Share prices tick and move up and down in a way that is mesmerising. Expert views are two a penny.
What Bogle understands is that investing is all about finding shares in companies that can reasonably be expected to deliver an attractive rate of return. The context of the stock market is immaterial. I’ll explain exactly why today.
Ignore the stock market
When people ask me if I invest in the stock market, I reply “No – I invest in businesses that happen to have their shares quoted on the stock market.”
You could, of course, argue that the stock market matters because you are more likely to find attractive shares when the market is at a low point. But I am not even sure that is true. In my experience, there are companies with great prospects at all times, and if the market is rising and signifying the start of a new economic upswing there may well be more such companies.
Anyway, this has set me thinking of my other favourite stock-market quotes. The great Warren Buffett is responsible for many, including this: “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
Other versions of this say ten years, not five, but the principle is the same. Buffett invests in businesses and he does enough careful homework to satisfy himself that they cannot be seriously derailed by economic circumstances or bad management.
Along similar lines is an oft-quoted remark from another US investor, Peter Lynch: “Go for a business that any idiot can run – because sooner or later, any idiot probably is going to run it.”
It’s all about the product
The kernel of truth here is that a successful business will have a great product that customers want to buy. That’s the most important thing. So long as the management churns out the product and makes it available to the customers, it really does not have to do anything else except count the money.
Once management thinks that it needs to do more than that – to make acquisitions, for example, or have a strategic review – it is probably because the underlying business is not so great.
However, I do not believe that you should only buy shares in companies where you fully understand the product or that can necessarily be run by idiots. Who amongst us, for example, could really explain the underlying technology behind Google or Rolls Royce or Glaxo?
Products that are sophisticated cannot be easily copied, and companies with these sophisticated products need to be run by bright people and not fools.
Finally, you must be able to recognise when to cut your losses. A quote that rings home for me is the advice of George Soros. “It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong”. This is really rephrasing the old axiom ‘Cut your losses and let your profits run’.
The shares that have made me the most money are almost invariably the ones I have held for longest. If you realise that you have invested in a bad business – and we all make mistakes – then get out quickly. But if the business can multiply the value of your equity year after year, why sell?
‘If you want to be a successful investor…’
Let me finish with two more quotes. “The stock market is filled with individuals who know the price of everything, but the value of nothing”, said Philip Fisher, while Harvard Professor Michael Jenson warns that “average investors who try to do a lot of trading will only make their brokers rich”.
In today’s world of instant communication, it is easy to get fixated on share prices. And that can be very dangerous. As far as I’m concerned, very few investors spend enough time actually analysing or valuing companies.
This is far more important that simply trying to chase exciting shares or guessing the next hot sector. Unless you can do the latter, you are not an investor at all, but just a speculator.
So what would my contribution be to the lexicon of pithy stock-market sayings? How about this: “If you want to be a successful investor, you must invest in successful companies.”
That says it all, I think.