Think Like a Business Owner, Not Like a Trader

Doc’s note: Today, I’m sharing an essay from my colleague and editor of Extreme Value Dan Ferris. In it, Dan explains one of the simplest tips to getting rich in stocks… patience.

If you’re like most investors, you probably worry too much about short-term share-price movements.

To make several times your money in the stock market, you must learn to find great businesses… buy them at cheap prices… and above all, hold on to them long enough.

Multibaggers take time. If you can’t be patient, you can’t get rich in stocks. Period. No ifs, ands, or buts about it…

The good news is that these days, it’s easier than ever to be patient.

Andrew Pastor, a portfolio manager at asset-management firm EdgePoint Wealth Management, pointed this out in January. He says the average holding period for NYSE-listed stocks since the 1960s has been shrinking. From his essay…

The lesson is simple: Holding stocks for as little as two to three years qualifies as a competitive advantage for investors these days. (Pastor uses the term “proprietary insight,” the edge you give yourself when you behave differently from the crowd for intelligent reasons.) As he puts it…

I believe the most overlooked edge an investor can have is time – the willingness to look further out than other people. Fortunately, those who want a time advantage don’t have to wait as long as they used to since investors are holding their stocks for shorter and shorter periods…

Today, having a view about a business two or three years from now can be a proprietary insight.

Our strategy is designed to exploit this competitive advantage. The average holding period for all Extreme Value recommendations since inception in 2002 is about 1,150 days, or a little more than three years.

So some of the best benefits you’ll get from our strategy aren’t even included in our published results: better tax treatment and far lower trading costs. Commissions and fees, interest rates, and other “frictional” costs of overactive trading will eat away at your profits over time.

Don’t be a trader in the stock market. Be a business owner.

If you own a pizza parlor, you don’t wake up every day thinking about selling it so you can buy a shoe store. You think about how to make better pizza, how to sell more pizza, or how to do something for your customers that competing pizza parlors aren’t doing. You plan to hold that business for the long term.

Equity is long-term capital, the longest-term capital, with no expiration or maturity date. If you’re going to succeed as an equity investor, you must think long term. Obsessively watching share-price movements conditions you to think short term. You should be spending that time studying the businesses you own.

The lesson here is that a stock isn’t a lottery ticket with a price graph attached. It’s a proportional share in the fortunes (good or bad) of a real business.

That’s how I approach every buy, hold, and sell recommendation I make. You’ll do yourself a huge favor by doing the same.

Good investing,

Dan Ferris