Mindset for Potential Long-Term Success
The problem with the public markets is not the companies people invest in, but the mindset of the investors. When one looks at a stock only by where the share price is, they are typically making a huge mistake. The way some choose to understand a stock might be looking at technical charts or identifying patterns that they can make a proper risk vs. reward decision. This is not what I understand, and not how I look into a portfolio for my clients. I try my best to first understand the businesses owned as best I can, then I look at the stocks/investments price. If the above short-term trading works for you, then I truly respect that. I personally just want to become knowledgeable at what I understand which is not the short-term fluctuations in price.
I try my best to create a Long-Term picture by creating a relatively negative view compared to others and see what that price would be. A stocks price is based on estimates of how much Cash Flow a business will have in the years ahead, then discount that cash flow back to todays’ dollar value. This can go wrong if inflation is stronger than predicted, or if the business performs worse over the long-term than I expected. Although, that is why I try to be more negative on the prospects of the business to reduce this risk (although no one can remove the risk because the future is unknown until it happens).
If you were purchasing an apartment building for an investment, would you look at the purchase price solely or would you look at the quality of the building (to see if repairs need to be made), location, the number of units, and how much it would cost a renter per unit, etc.? I would say that a majority of professional Real Estate investors would look at the latter to validate what they are willing to pay for the building today. This is the properties Cash Flow similar to how I try to value a public company/investment product. Negative things can also take place just like when investing in public markets. For example, if the area the property is located starts to see people leaving, that building could potentially do worse than expected when purchased (pool of people renting decreases possibly increasing the buildings vacancies). This is similar to how a company can do worse than predicted because no one knows what the future will bring until it occurs.
This approach can be tough to take in a public market where prices can fluctuate violently over a period of days, months or even years (especially in today’s environment). This does not change the importance of looking at a stock as a company prior to the share price. In my opinion, knowing what you own is the most important factor in the public markets. I do not discount the importance of diversification and asset allocation, but knowledge of the businesses/investment products you own and what you would pay for them with the known factors at the time can bring long-term gratification if done consistently.
Not all opportunities work as expected, especially in the short-term. But valuing the business before looking at the stock gives me more comfort in what I own, even when the price decreases. It gives me comparatively more comfort when the price decreases because I can add to the company I thought was worth buying at higher prices (I can buy more of it for the same amount of money). Although this never will remove the gut feeling when you purchase at lower prices, but in my opinion at least I try my best to know what I am buying for myself and my clients.
Lets’ say you purchased that apartment building from earlier in the article. A year later the apartment building is worth less than what you paid for it if sold today. Although, you notice that rental income has increased since you purchased it and the location is in a growing community. Would you say “this building is worth selling because the price is lower”, or would you look at what the building produces now and possibly what it could in the future (update building, renovations, etc.)? I would look at what the building produces and what it could potentially produce if I improved the property etc.
I could write about this for hours and this article just gives you a glimpse into how I think. If I could leave you with one thought I would say this. Try your best to learn about what you own before looking at what the price is today. Paying attention solely to price will bring emotion into the decision made, and if you have read my previous articles then you would know that emotion is what brings some of the worst investment decisions if acted on. Trying to know the business/investment will help you stay focused not only on the investment over the current share price, but also will give you more comfort in helping you reach your long-term financial goals. Isn’t this why we all invest in the first place? Share price is guaranteed to go down at some point and could happen immediately after buying, but always remember that stocks increase in risk not when they go down, but go UP.
I hope you can take something from the article and implement the thought process into your method of making money work for you. You do not have to think exactly like I do, but I would say ignoring the investment based on emotions like the Fear of Missing Out or the Fear of Losing Money will lead to potentially devastating long-term results unless you get lucky on calling the market movement. And if you do get lucky, I believe it would be extremely unlikely to be repeated again. Stay focused on your goals and try to understand the investment you are making prior to where the share price is. Daily moves in price are usually background noise if you are truly investing (unless there is a major news announcement), the important factor is the health of the underlying business that the share price is based on. The stock market can be manipulative day to day but historically speaking, the stock market has risen over time and can reward the patient investors who learn about what they own before making their decisions.
Riley Sisson
Branch Manager, RJFS
Any opinions are those of Riley Sisson and not necessarily those of Raymond James.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results.
Real estate investments can be subject to different and greater risks than more diversified investments. Declines in the value of real estate, economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments. Holding stocks for the long-term does not insure a profitable outcome. Investing in stocks always involves risk, including the possibility of losing one's entire investment.
