The length of time a share is owned these days is less than twelve months on average. It used to be several years. The problem is that most investors aren’t investing. They are trading and speculating. There is a world of difference between the two strategies. In fact, I am not convinced that most trading and speculating is a strategy as such. It’s more akin to gambling. Taking short-term punts on buying and selling stocks.
The better strategy is to change your thinking and invest in businesses rather than shares. This is what the world’s most famous investor, Warren Buffett, does. You see when you invest in a business your whole mindset is different to that of a share trader.
A trader is only interested in short-term gains. He isn’t interested in whether or not it is a great business with excellent long-term performance potential. In fact, he couldn’t care less. The latest quarterly results are as far ahead as he looks. As long as he makes a short-term gain then he is pleased.
A business owner, on the other hand, studies the business thoroughly until he really understands it. He wants to know everything about it. If he is a value investor then he is likely to be most interested in the following traits of a great business;
- A visionary founder owner with skin in the game still working in the business
- A competitive advantage or financial moat and ideally a monopoly, a duopoly or oligopoly
- A record of high growth in revenue and profits annually together with a small percentage of a large total addressable market
- An above average return on invested capital (ROIC) as well as excellent capital allocation skills
- A high level of free cash flow
Such businesses are likely to produce excellent profits for many years ahead.
So when analysing a company as a business your approach is totally different to that of a trader or speculator who is investing in shares for a short-term quick buck. The business analyst wants to invest long-term in a great business that will compound returns.
I know which strategy I prefer. How about you? You know it makes sense.*
Tony Byrne, Managing Director
If you want to learn more about this topic, please find the link here.
More information about our fund can be found here: Hargreaves Lansdown or AJ Bell
*Risk warnings
The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
