INVESTING FROM A BUSINESS PERSPECTIVE

Investing from a business perspective is a most challenging concept. This is not because it requires a fair amount of financial and accounting knowledge, which it does, but rather because it is so different from the prevailing wisdom peddled by the great investment houses of Wall Street.

As you read books about Ben Graham or Warren Buffett you will come to see that having a business perspective on investing is more about discipline than philosophy, and once the concept is understood, it demands absolute devotion. Stray from it, and you will wander the financial lunar landscape, forever dancing to the folly called forth by fear and greed.

Adhere to its wisdom, and the foolishness of others becomes a field in which you reap your harvest. In short, other people's follies, brought on by fear and greed, will offer you, the investor, the opportunity to take advantage of their mistakes and benefit from the discipline of committing capital to investment only when it makes sense from a business perspective.

But be warned: it is not an all-encompassing discipline, on which the practitioner can rely in any situation in order to produce a profit. It is, rather, as Graham said in reference to bond selection, 'a negative art.' It is a discipline that tends to tell the investor as much if not more what not to buy than what to buy.

You will find that almost everything that relates to business perspective investing is alien to Wall Street folklore.

You will find yourself waiting for the market to go down instead of up, so that you can buy partial interests in publicly traded companies that you have been wanting to own.

You will adopt the wisdom of businesslike thinking and come to realize that the stupidest reason in the world for owning a common stock is that you think the per share price is going up next week.

You will change your perspective from one that leads you to buy a stock in hopes of a 25% move in the next six months to one that leads you to buy a partial interest in an ongoing business venture--a business venture that you anticipate will in five or ten years produce for you an annual compounding rate of return of 15% or better.

You will learn that diversification is something people do to protect themselves from their own stupidity, not because of investment savvy.

You will find yourself getting great investment ideas from shopping in the supermarket or mall.
You will discover that Pollyanna and your stockbroker both may be wildly optimistic but neither is very intelligent in matters of finance.

You will learn that a $15 per share stock may be cheap and a $0.20 stock may be grossly expensive.

You will start thinking of stocks as bonds with variable interest rates.
And you will realize that though Warren Buffett adheres to the philosophical underpinnings of Graham, he has long since left the fold. Buffett is seking value, but not in the same mode or frame-work in which Graham did.

What does 'Investment is most intelligent when it is most businesslike' mean? It means that one stops thinking of the stock market as an end unto itself and begins thinking about the economics of ownership of those businesses that the common stocks represent. It was Graham who taught Buffett, instead of asking (a) in what security? and (b) at what price? to ask (a) in what enterprise? and (b) on what terms is the commitment proposed? This puts the line of questioning into a more businesslike perspective.

Buffett's chief idea is to buy excellent businesses at a price that makes sense. So, what makes business sense? In Buffett's world, making business sense means that the venture invested in will offer you, the investor, the highest predictable annual compounding rate of return possible with the least amount of risk. The reason Buffett is able to do this better than other investment managers is that he is motivated by the long term--like a business owner--and not, like most Wall Street investment professionals, by the short term.

Whether he is buying an entire business or fractional proportions on the stock exchange, Warren Buffett asks himself: How much money can this business predictably earn, and what is the asking price? When he gets the answers to these questions, he can do some comparison shopping. Buffett, like any good businessman, likes to keep a good business. To Buffett, ownership of the powers of production of the right businesses is of greater value over the long term than the short-term profits usually promoted by Wall Street.

Sage@wallstraits.com
Credits: Much of this article is extracted from Mary Buffett's Buffettology, chapters 4 and 5.


POSTED :24 Mar 2005