Investing in a Business not a Stock Symbol

“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.

 

 

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Returns for Great vs. Bad Businesses

Munger and The Cattle Rancher

Munger’s ability to find great businesses is directly related to his ability to consistently discard bad businesses. He is excellent at inverting, and discarding the bad businesses as quickly as possible.

The Abominable No-Man and Bad Management

Some investors think a business is good, but know that management is bad.  These investors justify the investment based on the idea that the great price of the business is worth the bad management. This is akin to marrying a supermodel who is going to yell at you all day.  Whatever pleasure your eyes may derive from the marriage, your ears will endure a greater amount of pain in the long run. The pocketbooks of those partnering with bad management are likely to see a similar 50%+ decline in their net worth.

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