Overview
MANY OF TODAY’S INVESTORS HAVE LOST THEIR WAY WHEN IT COMES TO HAVING AN OWNERSHIP PERSPECTIVE ON THEIR INVESTMENTS. ADDITIONALLY, THEY LACK INTEREST IN HAVING CLARITY IN THEIR INVESTMENT APPROACH. TRAGICALLY, THEY FAIL TO REALIZE THAT THE CONCEPT OF OWNERSHIP AND CLARITY ARE PARAMOUNT TO INVESTING SUCCESS. INSTEAD OF VIEWING THEIR INVESTMENT PORTFOLIOS LIKE A BUSINESS OWNER, TODAY’S INVESTORS ACT LIKE SHORT-TERM RENTERS OF COLLECTIVE FUNDS THAT ARE PERPETUALLY SWAPPED FOR THE NEXT HOT FUND IN PURSUIT OF QUICK RETURNS.
… today’s investors hold on to stock compared to 50 years ago; eight months versus eight years, respectively.
WE BELIEVE THAT TODAY’S INVESTORS SHOULD STOP MAKING THESE EMOTIONAL MISTAKES AND START VIEWING THEIR INVESTMENT PORTFOLIOS LIKE BUSINESS OWNERS VIEW THEIR COMPANIES. IT’S A SHIFT IN MIND SET THAT HELPS YOU GAIN MORE CONFIDENCE AND CONVICTION IN YOUR INVESTMENTS, AS WELL AS PEACE OF MIND.
IT’S A SLIPPERY SLOPE… IF YOU THINK SOMETHING IS FUNDAMENTALLY MEANT TO BE USED ON A SHORT-TERM BASIS AND CAN BE EASILY REPLACED, ONE MORE READILY TURNS IT IN FOR A BRIGHT SHINING NEW ONE.
Today’s investor is void of conviction as to the components of their “rented” portfolios. When market corrections or natural fluctuations occur, they create a tidal wave of fear, causing them to capitulate and make emotional decisions on important investments they perceive as “rented.”
Investors who focus on building portfolios concentrated in mutual funds and ETFs, possess an identical cavalier and whimsical attitude. They simply don’t view themselves as business owners. This mind set is rooted in the collective ownership structure of mutual funds and ETFs. Due to the blended nature of these investment vehicles, investors feel less affinity or ownership to the underlying holdings.
It’s as if investors feel they can rent the components that are in their portfolio on a revolving basis while still gaining the advantages of active portfolio management by shifting from one ETF or mutual fund to another. This idea is supported by the dramatic change in the average time period that today’s investors hold on to stock compared to 50 years ago; eight months versus eight years, respectively. The sad fact is that these same investors view themselves as having a long-term investment perspective and time horizon.
BOTTOM LINE: INVESTORS DO NOT POSSESS THE RUDDER OF CLARITY CONNECTING THEIR INVESTING GOALS WITH THEIR LIFE GOALS. IN OUR PAPER, WE HOPE TO MAKE THIS CASE AND HAVE FOUND THAT USING THE ANALOGY OF PEOPLE WHO RENT CARS HAVING A NONCHALANT ATTITUDE TOWARDS THAT VEHICLE’S UPKEEP IS AN EFFECTIVE MEANS OF EXPLAINING THIS KEY DISCONNECT. IT’S COLLECTIVELY COSTING INVESTORS A FORTUNE AND UNLESS YOU’RE WILLING TO CHANGE THE WAY YOU VIEW YOUR PORTFOLIO, YOU WILL KEEP MAKING THE SAME MISTAKES. LET’S BREAK THIS ISSUE DOWN AND DEFINE 3 EASY WAYS YOU CAN TAKE TO HELP REMEDY THIS SITUATION.
When was the last time you washed a rental car or changed its oil? Anyone who has rented a car before has to admit that the care taken for that vehicle is nowhere near that of their own as there is little incentive to mechanically maintain a rental car, this includes keeping it clean. This is because the renter sees no future benefit from washing it as once they return it, they most likely will never see it again. Conversely, a person who actually owns a vehicle has a strong incentive to take care of it. This is due to them knowing that the future value of the car will increase with routine maintenance over the long-term.
The car rental example is worthy of comparison in that the care and affection taken in renting a car for a day or two is not remotely close to that of owning an automobile we diligently saved tens of thousands of dollars to purchase and tend to keep for many years.
For investors, pride in ownership is coming to understand that owning a stock is the same as being an owner of that business. You are not renting that company, you own it. Frequent buying and selling of these holdings may diminish their long-term potential value and have adverse tax consequences.
3 EASY WAYS TO INVEST
LIKE A BUSINESS OWNER
SO THE QUESTION IS, “HOW SHOULD A BUSINESS OWNER APPROACH THIS ENDEAVOR AND WHY IS IT IMPORTANT?” WE BELIEVE THERE ARE THREE CHARACTERISTICS THAT ALL BUSINESS OWNERS SHARE AND THAT INVESTORS SHOULD FOLLOW AS WELL:
1. CONVICTION AND CONFIDENCE
Business owners have a firmly held conviction and knowledge of why they are in business. They have a deep understanding of what they do and why they do it. Investors should take a cue from this concept by having a firm grasp on what they own and why they own it.
Research has shown that people who possess a foundational knowledge of what they can and cannot control have greatly reduced levels of fear when the unexpected occurs compared to people who do not have a firm grasp on these facts. Investors who view themselves as business owners and who understand what they own and why they own it, joyfully see price declines as opportunities to buy more shares versus fearfully selling an undervalued asset to someone else at a discounted price.
2. PERSISTENCE AND PERSEVERANCE
Business owners have a sense of stick-to-itiveness that drives them on when their operation appears to slow down or the competition intensifies. Business owners don’t quit, give in or quickly start making plans to sell the business… it’s quite the opposite. They invest back in the resources that made them successful believing the set-back to be a spring board to the next phase of the business cycle, instead of a sign of capitulation. Investors should take a cue from this concept by having a firm grasp on the inner workings of each investment in their portfolio and how they function collectively, so that in times of volatility they don’t panic and deviate from their plan.
It’s both understanding the individual components of the companies that investors hold and how they relate to one another that is key. Just like vehicle owners know that cars have brakes, tires, batteries, and drivetrains, the more important realization is how they function in allowing the driver to transport themselves from point A to point B. The driver knows that turning the key will allow the battery to be engaged to start the car which in turn engages the drivetrain to push the car forward, while placing our foot on the brake slows the car and allows it to come to a stop. They are all critical parts of one system, not mutually exclusive parts. Their value is in how they work together.
It’s both understanding the individual components of the companies that investors hold and how they relate to one another that is key.
Investors who see themselves as business owners realize how certain companies in their portfolio may react to changes in the economic cycle in a differing fashion and don’t view them independently of one another but rather from a holistic point of view. This prevents investors from selling perfectly sound businesses that may have temporarily dropped in price while other businesses are prospering at the same time. They properly see these varying reactions as a function of diversification rather than one component being better and needed or worse and not needed. The driver realizes they need the brakes as much as the battery for the car to function. The astute investor who views themselves as a business owner does the same as it pertains to the various holdings within their portfolio and has a foundational understanding of the inner workings of their portfolios, thus enhancing their pathway to Clarity.
3. CLEAR VISION OF GOALS
Business owners have a solid understanding of their vision statement and goals. They rely on this knowledge to act as a rudder in the decision-making process for everything they do. Investors should act in kind, by envisioning themselves on a purposeful road to a clear set of goals. They should view every investing and financial decision in context of its broader meaning and implications to these personal goals. Going back to our car example, just as the owner of a car realizes the importance of how the individual components function together, so do they understand how the car relates to, not only their overall plan of transportation, but their overall plan of life.
“How far will I drive my car to get to a particular destination before I decide to use air transportation?” “Is my car suited for driving in all types of weather or terrain and if not, how will I decide what other transportation I may need to take?” “How much will I decide to invest in my car as it relates to my overall finances versus that of other areas of my life?” All of these questions have to be weighed as they relate to one’s overall life plan before they can be certain that they are of most benefit to the individual.
The astute investor who views themselves as a business owner sees the companies they own in relation to their overall financial plan and how that plan aligns with their own personal moral convictions and ethical values.
CONCLUSION
CERTAINLY THERE ARE TIMES IN LIFE WHERE RENTING ANYTHING FROM LIVING QUARTERS TO A CAR TO EQUIPMENT IS APPROPRIATE, AND SOME INSTANCES IS A MUST. OUR HOPE IN WRITING THIS PAPER WASN’T TO BESMIRCH THE POSITIVE ASPECTS OF RENTING OR THOSE THAT DECIDE TO DO SO.
EVEN IN THE INVESTING WORLD, USING FUNDS ON A TEMPORARY BASIS IN THE EARLY THROWS OF WEALTH ACCUMULATION IS APPROPRIATE, NO DOUBT. WHAT WE DO FIND FAULT IN, IS WHEN SOPHISTICATED INVESTORS OF MEANS FALL PREY TO THE SHORT-TERM MENTALITY FOSTERED BY THE INVESTMENT INDUSTRY THAT LEADS TO FORMING A RENT VERSUS OWN INVESTMENT MENTALITY OR PHILOSOPHY. IN CLOSING, WE BELIEVE THE FOUNDATIONAL CONCEPT OF BUSINESS OWNERSHIP AS IT RELATES TO INVESTING IS PARAMOUNT. LET US HELP YOU GUIDE YOU ON YOUR INVESTMENT JOURNEY. CONTACT US TO SET UP AN INITIAL CALL OR MEETING WITH ONE OF OUR ADVISORS. WE’RE HERE TO HELP.
