Behind every stock is a business
Martin Hawes
March 2024
Behind every stock (share) is a business. Find out what it does.
Peter Lynch
Peter Lynch was a very successful investor running the Yale University endowment fund for many years. The quote above is a back-to-basics call; some investors focus on the share price but not enough on the business which underlies the shares. In the long run, it is the business that is important - it is the business performance which drives the share price and makes an investment successful or not. If you are going to invest in shares, you need to know what that business does.
If you have shares in a company, you own a part of that company. Many years ago I was outside on the lawn with my daughter. A helicopter flew over and my daughter looked up and said with a smile, “that’s my helicopter”. She owned some shares in The Helicopter Line at the time and she had seen the colours and name painted on its side. She did indeed own that helicopter!
This is a good example of Lynch’s knowing what the company does. At very least you should also know the state of its finances, its assets, its future plans, its track record, and what competition it may be facing. You own the companies that are in your portfolio, and you need to know what (and how) they are doing.
Many Kiwis are afraid of shares. That is strange, really, because we Kiwis are not afraid of businesses - we go into business as quick as we can say “I’ll be my own boss”. I think part of the fear of shares is a throwback to the 1987 share market crash. That crash was severe – the index peaked at about 3,900 but it did not stop falling until some years later when it reached about 1,400. Many were wiped out, and there are still plenty of people who have an uncle, aunt, or grandparent who has warned ever since of the dire results that might occur if you invest in shares.
The 1987 sharemarket crash resulted in many instances of absolute and permanent losses which cut deep. It is something that still runs deep in this country’s psyche.
The other part of the fear of shares is their inherent volatility – the value can and does change, often with seemingly little or no reason. That is disconcerting, especially for new investors.
This volatility adds to the fear of shares but this fear does not extend to a fear of businesses. It is almost like listed shares are quite separate from businesses in the minds of some – they seem to think of shares as a kind of investment out on its own, like Bitcoin or futures contracts.
Sometimes people forget that when they buy shares, they are in fact buying a part of a business - and over time, the performance of the business will determine the value of the shares. There have been plenty of times when there have been speculative frenzies and people have lost sight of this fact. This was certainly the case in the lead up to the 1987 crash, but other examples abound: the dot com boom of the late 1990s, the Japanese binge in the 1980s, the roaring 1920s in the USA. All of these booms ended in crashes.
I wasn’t there for the last of these, but I did witness the others – and invested up to and through the 1987 crash. Like a lot of people, in 1987 I lost plenty.
It was said before the 1987 crash that you could buy an old shed, name the company ShedCorp and happily float it on the sharemarket for millions. I can certainly report that there was a lost connection between shares and the value of a reasonable business. Anything called “shares”, no matter how flimsy or stupidly priced, caused a buying stampede.
The best investors simply follow the Warren Buffett aphorisms: buy a good business at a fair price; and if you don’t understand how a business makes a profit, you shouldn’t own it. They know any business that they own intimately – they certainly know what it does, and they know the significance of every move it might make whether for the good or the bad.
An investor needs to take the attitude of an owner, knowing what a fair price for the business is, and letting the share price take care of itself. If you own some good businesses and follow what they do, you can expect to be a successful investor.
In closing, once you have made the decision to purchase shares in a company, regular monitoring of the company’s performance is important. Buying and holding forever is an admirable objective, but businesses change and so do valuations, so active monitoring is an important part of direct ownership. If you don’t have the time or the skill to actively monitor your portfolio, outsourcing to a fund manager or financial adviser is an option that should be considered.
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For information relating to Martin Hawes, visit his website. Martin Hawes is not a Financial Adviser or a Financial Advice Provider. The views in this article are not intended to be financial advice. The views and opinions are general in nature and reflect judgement on the date of communication and may change without notice. They may not be relevant to an individual's circumstances. Past performance is not a reliable guide to future performance. Before making any investment, or other financial decisions, you should consult a professional financial adviser. We have prepared this web page in good faith based on information obtained from other sources, but we do not guarantee the accuracy of that information. We do not make any representation or warranty (express or implied) that this web page is accurate, complete, or current and to the maximum extent permitted by law disclaim any liability for loss which may be incurred by any person relying on this web page. Martin Hawes provides these articles to Forsyth Barr Investment Management Limited for the Summer KiwiSaver scheme and is remunerated for them.