Maybe the biggest mistake investors make is buying shares of Apple or Zoom or whatever and then hoping the price goes right up.
It’s why you sometimes hear that the stock market is just a big casino.
Because some investors are just buying “prices” and then hoping to sell their prices at some higher price to someone else who’s then hoping for the exact same thing.
Which is gambling.
A more reliable way to make money investing is to invest like you’re buying a business. After all, that’s what a share of stock is. It’s a tiny piece of the business.
And when you buy shares like you’re buying tiny pieces of real businesses it just might change how you invest.
For instance, pretend you and I each put up $50,000 to buy a McDonald’s restaurant together.
Would I call you every day offering to sell you my 50% stake, just sitting there shouting random prices through the phone:
“I’ll sell for $43,947? $54,924? $48,586? $57,097? $46,607?”
That’s what happens in the stock market though. You can buy and sell pieces of businesses almost nonstop, and at seemingly random prices.
This little quirk creates opportunities though.
You see, the market does an okay job figuring out how much a business like Apple or Zoom is worth. The price of a stock is usually “right”. But sometimes prices are wrong. They swing too optimistic or too pessimistic. Too high, too low.
Think about it like this.
Say that I wake up this morning and feel super bullish about the future. I call you first thing and offer to sell you my McDonald’s stake for a whopping $100,000. You know it’s worth about $50,000. Do you buy? Nope.
But then the very next morning I wake up and feel super depressed. So I call again and offer to sell my stake for just $25,000. Now you know that nothing with the restaurant changed overnight. That the stake is worth twice that. Do you buy?
Like the saying goes, the stock market is there to serve you. When it offers a good business at a bad price you do nothing. When it offers a good business at a good price you buy. It’s as simple as that.
Yeah, but how do you know a good price? What’s a share of Apple or Zoom worth exactly.
You’ll hear professional investors say that a business is worth all future cash flows discounted back to today at an appropriate interest rate. (Translation: Money invested today should give you more money in the future.)
I wanted to learn what the professionals do, and so I took the Corporate Finance and Valuation class in the MBA program at New York University’s Stern School of Business.
Maybe the biggest takeaway was realizing that these very bright, capable people learning how to value businesses in order to work on Wall Street aren’t really learning how to invest.
Because look, if all it took to be a successful investor was plugging numbers into equations full of Greek letters then wouldn’t anyone with a calculator be rich?
It almost seems like the more numerical gymnastics you perform the worse the result. Go read about that hedge fund run by a bunch of famous PhDs and Nobel Prize winners that blew up.
I’m not saying the science of investing isn’t important. You need math skills. What I’m saying is there’s also an art of investing.
Like when I’m thinking about investing in a stock I’ll go listen to the company’s past earnings calls and read past quarterly reports and play with past numbers. But then you need to make a guess about the future.
“What might Apple or Zoom look like in five to ten years?”
“What’s my view of their management team?”
“How might their growth strategy evolve?”
“Is their moat getting deeper and wider?”
The answers are totally subjective.
And I’ve noticed the investors who really excel at assessing and judging the intangibles just use lots of common sense. They see things so clearly. Think so clearly. They also easily change their mind, but don’t change their mind easily.
Which reminds me of that story about Picasso. Have you heard it? It goes like this:
Picasso was sitting in a Paris café when an admirer approached and asked if he would do a quick sketch on a paper napkin. Picasso politely agreed, swiftly executed the work, and handed back the napkin but not before asking for a rather significant amount of money. The admirer was shocked: “How can you ask for so much? It took you a minute to draw this!” “No”, Picasso replied. “It took me 40 years.”
The longer you invest the more you realize that being good at investing has little to do with combing through mountains of data or spending hours crunching numbers.
To be good is blending science and art. It’s hard data and soft data. Left brain, right brain.
Any artist will tell you that art is not knowing what comes next. Not knowing how the future unfolds. You can never entirely know.
So the artist, like the investor, makes guesses. They might be wrong, but they keep at it.