“Investment is most intelligent when it is most business-like.” Graham
“I am a better investor because I am a businessman and a better businessman because I am an investor.” Buffett
These phrases and line of thinking are a familiar refrain among value investors. I hear these used so frequently now that I believe they may have lost their meaning. What follows is what these phrases mean to me, which may or may not be the correct meaning, but I think it has helped me enormously in becoming a better investor.
Owning a private business is all about cash flow. You can’t sell 1,000 shares each month to pay your mortgage or buy your kids’ school clothes. The company has to produce real cash flow, not accounting profit. Real cash flow shows up on the bank account, not just the financial reports. Owning a private business (and especially a small business) means checking the bank account each morning instead of checking the ticker throughout the day.
After my brief stint as an attorney, a few partners and I purchased two different businesses. The first business we owned was a group of movie theaters in Utah. These theaters all deposited cash each night. I was living in NYC at the time and despite the two-hour time difference, I would invariably wait up each night to check the deposits. The second business was a health care business, which received its cash flow through direct deposits. These deposits appeared on the bank account each morning. Opening up that bank account each morning was the first item of the day. (Incidentally, after having sold the second business I am still friends with the owner and he has never removed me from “view access” on the bank account and I still find myself checking that bank account some mornings–old habits die hard, I suppose).
I only discuss the details of my “bank account checking” to illustrate how vital cash is to a business owner. I don’t see this same obsession among my fellow business owners as shareholders (and I never see it among “analysts” or journalists who aren’t business owners as shareholders). The only people who come remotely close to an obsession regarding cash flow are short-sellers. Short-sellers probably have a lot to teach the buy-and-hold crowd. Invert, always invert.