The best thing about long-term oriented stock investing is that it doesn’t require lot of work by us, the investors. Instead, we loan our money to people running actual businesses – and they work for us. We own shares in these public companies – so when they make money, we make money.
Stock investing is just like owning a business – except that we are passive and junior partners in that business. Passive because we won’t be involved in running the business. We won’t be asked to make any decisions. We keep our day jobs elsewhere. Junior because we are minority owners. We can’t overrule the management. We can fire them (by selling our shares) if we don’t agree with them. But as long as the business is in good hands, we will get our share of the profits.
Even in the eyes of the law, an investment security is an “investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others” — U.S. Supreme Court 421 U.S. 837 (1975)
It is those entrepreneurial efforts of others that we passive investors count on.
As you can see from this previous post, I have owned Amazon shares since 2000. I have gradually bought more shares since then, but I have yet to sell any. From my perspective there never was a reason to sell. I just sit back and let Jeff Bezos work for me. His relentless drive to build a retail empire continues to bear fruit. No effort on my part. I check the quarterly reports and enjoy reading his annual shareholder letters. Those letters, by the way, are very thoughtfully written. If you’ve never read a Bezos annual letter, you should spare some time and read one. You’d be pleasantly surprised. Here is his most recent one. One could tell he is a shareholder-friendly owner-manager. Over the years, I got to know him well through his letters. I trust him with my money.
All those years while Bezos was building his business, I was working elsewhere. Could I have built a business like Amazon myself? Hardly! I wasn’t smart enough nor so focused or driven. It takes a special person like Jeff Bezos (and Sam Walton, before him) to build a retail behemoth from scratch.
I probably couldn’t even have lasted too long if I were working for Amazon. If Brad Stone’s book (“The Everything Store”) is anything to go by, Amazon’s work culture is best suited for ambitious hard-charging employees. Still as he grows the company, I enjoy a small share of his success.
There is one big difference between a full-time business owner and a passive shareholder. If you are a business owner, nobody comes to your shop every day and offers you a valuation of your business. Yet this is exactly what happens to us, passive shareholders. Every day the stock market is open, we are offered a price for our share in the business. It is up to us to choose to ignore it or do something with it.
Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis.
Ben Graham, “The Intelligent Investor”
If you have a full-time job or may be a full-time business to run, you’re better off not be distracted by the daily gyrations of the stock market. Well … you don’t have to. It turns out that investors with long-term view need not be spending time watching their stock investments. Your stock portfolio will ebb and flow but over time it will grow as the economy grows.
Two key traits that I look for in businesses are (a) durability of business to survive changing economic conditions and (b) managers who are also significant owners in the business. Passionate founder-owners are our best partners. They run their businesses as owners, think like shareholders, and work hard to achieve success. I’d gladly give them my investment capital and let them grow it for me.
I previously wrote about my investments in Starbucks, Simon Property, and Blackstone. As an investor, I am attracted to these companies because they are driven by founders who have significant skin in the game. They are focused on growing their businesses. And I just ride their coattails!