As Safe As Houses
Deciding what companies are worth investing in is one of the most difficult parts of being an investor. But if you approach stocks in the same way you buy a house, you can make the decision process a lot easier.
After a painful earnings season, minor shakeups and failed expectations can cause panic amongst retail investors.
Seeing share prices drop as companies miss analyst expectations will push many investors to cut their losses and sell perfectly good companies for less than they originally paid.
What these investors fail to see is that these earnings reports are just a drop in the ocean when you think about the long-term growth and prospects of a company.
I believe in buying stocks and holding them for the long-term. But under a constant barrage of news and speculation, it can be hard to stay focused on the potential that’s five or ten years down the line.
So the next time you’re investing in a company, try to think about it as though you’re buying a house.
Stocks As Houses
As anyone who has ever been in the market for a house can tell you, there’s a checklist of things to look out for before you put pen to paper.
On the most basic level, you’ll want to know if the house is well built, with good plumbing, wiring, and sound-proofing.
You’ll certainly want it to be in a good location — a place with low levels of crime, good local schools, and amenities like parks and shopping outlets within distance. You might even check if there’s sufficient drainage in the area, and if the house has ever been flooded before.
Finally, you’ll compare the asking price for that house with similar properties in the area. This is to help you decide how much you should offer, and to ensure you’re not being ripped off .
You’d be a pretty irresponsible home-buyer if you didn’t ask at least some of these questions before you bought a house.
So why not follow the same process when buying a stock?
What Makes A Good Company?
When weighing up an investment, it’s crucial to find out everything you can about the company.
Do they have a strong financial forecast, some sort of sustainable competitive advantage, or potential future prospects for development?
Who’s in charge of the company? Are they trustworthy? Do they have a history of creating value for shareholders?
Try to think of the wider industry like you would the location of a house. Is it an area in growth or decline? Has it been marred by scandal in recent years that might speak volumes about the integrity of the people working in it? Have a look around at some similar companies in the sector — is the price you’re being asked for reasonable?
These are all important factors to consider when you buy stocks. Remember, a stock is not just a piece of paper or a lottery ticket — it’s your stake in an actual company.
In my experience, very few people buy a home to live in with a future selling price already in mind. An investment in a house is primarily based on the need to put a roof over your head. Twenty years later, when you decide to sell, you’ll hopefully find some nice price appreciation and be pleasantly surprised.
With stocks, people tend to focus entirely on how much money they’ll make when they eventually cash in, which causes them to obsess needlessly over the price every day.
Can you imagine how much distress you would put yourself under if you had someone come over every single day to value your home?
People don’t do this as they usually have no intention of selling the house for many years. Therefore, the price at a specific moment in time doesn’t really matter.
Look Towards The Long-Term
People are finding it increasingly hard to take this approach when it comes to investing in stocks however.
We can now get the second-by-second movements of a stock price free of charge. We spend hours staring at the numbers, thinking that if we could just make sense of them, we would somehow be able to change them.
When we’re buying a house, we spend a lot of time looking at the pros and cons of the house and focus on the buying price. When buying stocks however, the majority of investors spend hardly anytime worrying about the buying price, but become utterly obsessed with the potential selling price.
Warren Buffett, the greatest investor of our time, has been consistent on this point over decades:
“Don’t watch the market too closely. The money is made in investments by investing and by owning good companies for long periods of time. If [investors] buy good companies, buy them over time, they’re going to do fine 10, 20, 30 years from now.”
I think we could all do much better in the stock market if we started investing in companies the same way we buy homes. Buy a well-built house in a good area for a reasonable price and the chances are you’ll make a tidy profit over time.
Buy an attractive stock in a good industry for a reasonable price and… well, I’m sure you can guess the rest.
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Emmet is the CEO and co-founder of Rubicoin, a company that teaches you how to become a better investor.