Business Owner vs Stock Market Investor

November 21, 2011 2:20:00 PM

One of my big challenges of being a Portfolio Manager, is the process of trying to consistently communicate the complex process of investing in an easy to understand way for investors. There are so many moving parts to the process of being a successful investor, yet, at the same time, it is so basic.

Recently, I was reading a document titled, Seven Sins of Fund Management. This is a tremendous document which details what is believed to be Seven Sins of mutual fund management. Obviously, I am partial to the document because it focuses on many of the investing tenets I subscribe to as well as discuss often in my writings.

Today, I want to focus on one of the topics which, in light of the uncertainty and fear surrounding the markets and the economy today, I believe are extremely important to discuss.

However, before I do so, let me be clear; I believe when investors are fearful of investing, historically, that has been the best time to be an investor. It is only when nobody is fearful and everyone wants to invest in the stock market, that you end up with short-term stock market bubbles. Does the year 2000 ring a bell for anyone?

So, today's topic (as quoted in the Seven Sins Document), many investors seem to end up trying to perform on very short time horizons and over trade as a consequence.

I find it amazing how common it is that investors gauge their portfolio decisions and performance over short periods of time instead of asking the more important questions (which I will cover below). Clearly, it is no wonder why so many investors end up underperforming in their investments, buy at market highs and sell at market lows, and constantly chase returns as opposed to focusing on the fundamental structure of the businesses they own in their portfolio.

This leads me to a point I have discussed on several occasions, the business owner vs the stock market investor.

Below are a few general comparisons I have noticed between the two:

Business Owners:

  1. Know what they own and why they own it.
  2. Look at their business as a long-term investment.
  3. Continually invest in their business (dollar cost average)
  4. Don't look at the value of their business daily, weekly, etc.
  5. Business decisions based on business objectives.

Stock Market Investors:

  1. Don't know what they own and why they own it.
  2. Look at their investments as a piece of paper they can sell at any time.
  3. Don't DCA when an investment has gone down in price.
  4. Look at portfolio values daily, weekly, etc...
  5. Decisions based on emotions and greed.

Obviously, the examples above are general in nature and there are exceptions. However, when reviewing the history of the individual investor, I believe that they become far to engaged in the day-to-day noise of the markets and the value of their portfolios as opposed to being a true investor and focusing on the qualities of the companies they own.

There are many reasons for why this is the case. Of course, investing in the stock market as a whole over the last 10 years or so, has been very difficult. Investors are obviously worried about being urned once again. However, when a business owner has a year when revenues and or earnings are down, do they sell their business? Do they stop investing in their business? I would argue in most cases, of course not! They continue to invest in their business and manage the challenges in an effort to grow their business long-term. This is the power of dollar cost averaging into a company, not necessarily the stock market.

Remember, don't think of your investments as merely a piece of paper. Understand that you really are part owner in a business!

Mark Pearson


Mark Pearson

Mark Pearson

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