Investing Principles: Owner Mentality

During the past year and a half, I feel like I've gained enough experience (mainly through making mistakes) to begin formulating a set of personal "investing principles".

It's one thing to read generic aphorisms about investing in theory ("be greedy when others are fearful"), but quite another to execute on them in practice with money, uncertainty, emotion and individual temperament in the mix.

This is the first post in an ongoing series that will attempt to explicitly lay out some of these principles, with a focus on practical rules and personal, actionable guidelines.

Owner Mentality

Each stock share should be treated as a tangible ownership stake in a company, not an abstract stock ticker with an arbitrary price attached to it.

This is not a profound statement, but it's hard to grasp because stocks are abstract. People who spend dozens of hours researching a new car purchase might spend mere minutes researching a stock. A car is tangible while a stock is not.

Some concepts that have helped me make this idea more concrete:

  • Assume that you are buying 100% of the company, even if you are only buying one share.
  • Assume that you are inheriting 100% of a family business.
  • Think of things in terms of the "company" and "business", not the "stock"

Once you accept the ownership proposition, a few corollaries naturally follow.

Long Term View

Owners should be concerned with the long term health and sustainability of the business, not short term earnings.

Undue focus on quarterly earnings and forward "guidance" are distractions. Owners know that 3-months is usually not enough time to determine a trend, and most businesses deal with enough uncontrollable uncertainty that short-term guidance is likely a waste of management's time.

A management that is obsessed with "hitting the numbers" is more likely concerned with outward appearances (or outright fraud) than fundamental business health (see WorldCom, Enron, QWest). A long, unbroken history of earnings growth is more likely a sign of accounting manipulation or luck than management prowess.

The balance sheet is just as important as the income statement (if not more so). Do you have enough cash to pay employees? Do you have enough working capital? Is your debt sustainable? Do you have a realistic assessment of your company's assets and liabilities?

A long term view is even more important (and a significant investment edge) in a world with an increasingly short attention span. Meditation is a good weapon for countering distraction.

Management Evaluation

As an owner, management works for you.

When you buy a share, assume that you've inherited 100% of a family company.

Would you hire the same people currently running the company?

Would you be happy paying them the same salaries with the same incentive plans?

Does the Investor Relations department respond to your queries? If you were the owner of a company, wouldn't you expect an employee to answer your direct questions about the business? (As a side note, I've actually been pleasantly surprised by most of my queries to IR. I've received thoughtful responses from CFO's and heads of IR departments, for companies both small and large).

"Shareholder friendly" takes on an entirely different meaning when you realize that the company "works for you" - of course they should be friendly!

Culture

Check Glassdoor to get a general sense of the culture of a company. (However, note that the most polemic reviews are likely written by disgruntled employees who were fired for good reason).

Watch videos and listen to earnings calls with the CEO and other members of the executive team speaking in public. You can learn a lot about a company's culture by the way management interacts with others.

Don't invest in companies that have a history of aggressive accounting, shady business practices, or shareholder unfriendly actions. These signs are symptoms of a rotten culture, and there is probably worse going on.

Price vs Value

The stock price is not necessarily an accurate reflection of the health of a company. Look deeper to more fundamental key performance indicators (KPIs), which will be unique to each business.

Just as you wouldn't pay $100,000 for a Toyota Camry (even though it might be a good car), you shouldn't overpay for Toyota stock (even though it might be a good company).

Valuation is the fundamental starting place for any investment or ownership decision. More to come on this topic in a future post.

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