This past January, about the time of Obama’s inauguration, Warren Buffett gave an interview to PBS corresspondent, Susie Gharib. In the interview Buffett was asked to give his greatest and most important business lesson. He responded:
The most important investment lesson is to look at a stock as a piece of business not just some thing that jiggles up and down or that people recommend or people talk about earnings being up next quarter, something like that, but to look at it as a business and evaluate it as a business. If you don’t know enough to evaluate it as a business you don’t know enough to buy it. And if you do know enough to evaluate it as a business and its selling cheap, you buy.
When thinking of stocks as more than just pieces of paper, but actual representations of underlying businesses, the investor is led to a more sensible approach. If as an investor you were considering buying a business that you would own, operate and would provide the majority of your income, it is likely you would not contemplate selling that business within seconds of purchasing it. Just as you would not think of buying a home in the morning and selling it in the evening, if your intent was to live in it.
A great example is Google (GOOG). Google is the dominant player in the search engine world commanding more than 64% of internet searches and is rapidly becoming a threat to longtime tech behemoth, Microsoft (MSFT). Google also produces and obnoxious amount of free cash flow and seems to grow that cash at will (see chart).
With market dominating performance and consistent operating results, it is safe to assume Google’s business value is stable and steadily growing. But if you were to look at the stock price, you’d never know it. In the past 52 weeks, Google’s shares have gone from a high of $510 to a low of $247 and now sit at around $430. Do these wild fluctuations make any sense given Google’s performance? Nope. But for those of us who are more concerned with the underlying business, we can just sit still and only move when to buy when the market greatly undervalues our business and sell when they overvalue them. This is why I don’t trade very often and prefer the “lazy” approach to investing.
Disclosure: I and the clients of Brick Financial Management, LLC owned shares of Google at the time of this writing but positions may change at any time.