One of the main pillars of Benjamin Graham’s teachings is to view stock ownership not as being in possession of pieces of papers that fluctuate in value, but rather as being part owner of a business enterprise.
His most prodigious disciple Warren Buffet best demonstrates this philosophy, by constantly buying good businesses at fair prices with the intention of holding them forever.
To do this successfully, one must be able to identify 1. Good businesses and 2. Fair prices. In doing so, an investor must walk in the shoes of a business person. Only when one knows business, will he or she be able to determine what is good or bad. And only when one knows how to price businesses will he or she be able to determine what is a fair or not so fair price.
Here's our mistakes. Don't do the same.
We asked 14 Singapore finance bloggers to share what they would do if they could go back in time and invest their first $20,000. They can no longer rewind time, but you can learn from their experience and hopefully start with a better footing.
Hence the quote –
Investment is always most intelligent when it is most business like.
Like many other quotes from Benjamin Graham, this one is choke full of wisdom. Over the years, I have come across this particular one often and have been rather fascinated by the term ‘Businesslike’. Strangely on more than one occasion, I have been able to attach further meaning to it and I believe retail investors can derive many more takeaways from this quote.
If I could be allowed to impose my own interpretation, here are five further reasons why intelligent investors must run their investments like how businesses are run.
1. Businesses Benchmark
Businesses compare themselves against other similar businesses all the time.
Retail stores compare revenue per square foot, banks compete on product offerings and preferential rates. Any business that serves customers will have customer satisfaction figures. Only when such comparisons are made will businesses know how well they are doing when compared to others.
Similarly, businesslike investing should also be about benchmarking. If you are a retail investor with a 100% equity portfolio, your biggest competitor will be index funds. If you cannot beat the index over five years, you have no business to be picking stocks on your own. (Warren Buffett does not beat the market all the time, by the way) You would be better off sticking to a low cost ETF and putting your time to better use.
Additionally if you manage your own diversified portfolio, being businesslike means pegging your returns to an effort-free option like the Permanent Portfolio. The time spent managing your portfolio could be put to better use.
In business speak. If you own a shop selling flowers and the business is losing money everyday, you would be better off closing shop, taking the proceeds from the sale and investing (assuming you are able to) it in the booming florist from across the street. It will give you better returns.
But before businesses can even benchmark, they need to keep good records.
2. Businesses track their returns
Unfortunately too few investors bother, or even know how to.
Proper records keep us from falling prey to the confirmation bias. When we process information we tend to seek information that conforms to our beliefs and discount information that states otherwise.
Subconsciously we all want to be excellent investors. We think we are. We will forever remember having the foresight to buy at rock bottom in 2009 but the painful and uncomfortable memory of being heavily vested in Blumont when it collapsed will be relegated to a distant corner. The amount lost in Blumont may be double the gain in 2009, but the salience of each event paints a totally different picture in our memory.
Without proper records, we are guided by our memory. And memories unfortunately are more often than not made up of what we want to remember rather than what actually happened.
3. Being business-like also means focusing on the big picture
If you are the CEO of Apple Inc and over time you realised that a product, say the ipod, is not doing well. Other products have sprung up to replace its functionality in the market. What the ipod can do the ipad and the iphone can do just as well. The decision to kill the product and move development teams, production capacity, shelf space and marketing budget into other more deserving products then becomes pretty straightforward.
As an investor, how often do we hold on to a dying stock? I have, and I am sure you would have as well, for a whole gamut of reasons ranging for emotional attachment to denial. In doing so, we have lost sight of the big picture.
4. Businesses also actively manage risk
Corporations have business contingency plans, they have ‘dark sites’ prepared online in the event of a catastrophic event happening. Insurance is an essential business expense and corporations insure their brand equity, assets and key men. All because businesses know the unexpected do happen and when it does, they have to survive the fallout.
For us the retail investor, how much do we really know about risk? Are we putting too much into one basket? Do we know how ‘risky’ or ‘volatile’ our portfolio is at the moment? When we add or remove a component from our portfolio, does the risk increase or decrease? Have we considered how a major geopolitical event would affect our portfolio? What about counter party risks, what will happen if our broker defaults? Are we insured?
The reality is when it comes to risk management, being businesslike is the last thing that is happening with retail investors right now. We could grow a lot more ‘intelligent’ in this aspect.
5. Finally, for any business to succeed, it must be consistent
Before being consistently good, it must first be consistently there.
Can you imagine Google or Facebook being unavailable at random times? Would you lose faith if your bank branch opens and closes without notice? How about your favourite wanton noodle stall? If you travelled a distance to find it closed without notice, three times, how many more attempts will you make before giving up?
Unfortunately for many of us, myself included, retail investing is seldom the number one priority in life. Work and family demands very much of our day to day attention. Major life events, new job, new home, new kid, new wife/husband all relegate investing to second place, or third or even further on.
We are far from being consistent in the way we conduct our investment affairs. We are far from being Intelligent Investors.
I have listed five reasons why individuals could do better when their investing becomes more businesslike. Benjamin Graham probably did not mean it this way but I doubt he would be complaining much if his quote, taken this way, makes us better and more intelligent investors.
Leave us a comment or drop us an email. Share with us if you are being businesslike with your investments. We look forward to hearing from you!