This article appeared first on The Stock Market Blueprint Blog.
Having a business mindset is a key characteristic of a value investor. Investors who think like businessmen understand that they are buying companies, not stocks.
This is important because when a businessman buys a company, he bases his decision on the company’s financial statements.
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Too many people buy stocks without analyzing the underlying business behind the stock.
Warren Buffett or Jimmy Buffett
There’s a scene in the movie The Wolf of Wall Street where an experienced Mark Hanna (Matthew McConaughey) is mentoring a young Jordan Belfort (Leonardo DiCaprio) on the realities of working as a stock broker.
The scene has a memorable line where Hanna essentially tells Belfort that stock picking is a useless exercise.
Ok, first rule of Wall Street – Nobody – and I don’t care if you’re Warren Buffett or Jimmy Buffett – nobody knows if a stock is going up, down, or…sideways.
This great line is profoundly true.
Stock movements on a daily, weekly, or even monthly basis cannot be predicted or explained. Warren Buffett - who is arguably the most successful stock market investor of all time – would not disagree with this statement.
Buffett doesn’t invest in stocks, he invests in companies. In one of his many famous one-liners, Buffett says:
“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
Investors who profit in the stock market understand this reality and do not place bets on what a stock will be priced in the short-term.
Instead, they evaluate a business’s financial statements and compare the current price to the company’s fundamental metrics.
Stocks are much more than ticker symbols on a screen; there is a company behind each set of letters. When buying a stock, investors become owners of the company.
Value investors act as if the entire business is for sale and analyze the stock the same way a small business owner would analyze a local hardware store.
Having a Business Mindset
Having a business mindset – and seeing the stock market as a place where businesses are bought and sold – is what differentiates value investors from speculators.
Rather than buying a “hot stock on the rise” with no regard for a company’s business merits (speculation), a good investor buys stocks based on the fundamental qualities of the company (investment).
Focusing on a company’s financial statements is one way to keep in perspective the fact that a stock purchase is an investment in a business.
A successful businessman is very selective when making a purchase, only following through with it if all his criteria are met.
Value investors think like businessmen and select their stocks carefully according to certain fundamental requirements.
Even more important than the financial and operating qualities of a company is the price an investor pays for the stock.
Every business has an intrinsic value – the net worth of the business after accounting for all assets, liabilities and future earnings – which the stock price does not necessarily reflect.
Value investors attempt to buy stocks that are trading for less than their intrinsic values.
Treating a stock as part ownership in a business and valuing it based on sound fundamental analysis of the company’s financial statements has proved profitable for great money managers such as Warren Buffet.
Following this approach will allow anyone – even Jimmy Buffett – to find success as a stock investor.
Mitchell Mauer is the Founder of TheStockMarketBlueprint.com. The Stock Market Blueprint is a site that finds value stocks for investors building long-term wealth. The site’s investment philosophy is anchored in principles established by Benjamin Graham and his most reputable followers over the last 100 years.