We all know that in order to be successful, value investors need to think about their stock purchases as part ownership in a real business, rather than as pieces of (digital) paper. In reality, however, it can be difficult to change your perspective in this way. After all, the average retail investor in a publicly traded company does not get invited to meet management, does not have a direct line to the CEO and generally exercises very little control over the business. Additionally, the proliferation of online trading platforms and the corresponding collapse in trading fees has made it easier than ever to buy and sell stocks.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Taken together, these factors create a psychological barrier that makes it difficult to think of shares in a company as anything more than numbers on a screen. How does one get around this barrier? Personally, I like to keep myself grounded using this farming analogy made famous by Warren Buffett (Trades, Portfolio).” data-reactid=”18″>Taken together, these factors create a psychological barrier that makes it difficult to think of shares in a company as anything more than numbers on a screen. How does one get around this barrier? Personally, I like to keep myself grounded using this farming analogy made famous by Warren Buffett (Trades, Portfolio).
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Forget about the day to day” data-reactid=”19″>Forget about the day to day
In an interview with Yahoo Finance, Buffett was asked whether he and his colleagues at Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) pay attention to the day-to-day news around Apple (NASDAQ:AAPL). This is what he said:
“If you have to closely follow a company, you shouldn’t own it. If you buy a farm, do you go up and look every couple of weeks to see how far the corn is up? Do you worry too much when someone says ‘this is going to be a year of low prices’ because exports are being affected, or something like that? I’ve got one farm that I bought in the 1980s, my son runs it – I’ve been there once! It doesn’t grow faster if I go and stare at it, I can’t cheer for it.
And I know that there are some years when prices are going to be good, and some when the prices aren’t going to be good. I know that there are years when yields are going to be better than others. But I bought the farm. And I don’t care about economic predictions or anything of the sort. I do care that over the years it’s well tended to in terms of rotating crops and that the yields get better, which they generally have.”
Most of us probably aren’t going to own a farm (if you do own one, hats off to you). But I think the example of a farm can be easily substituted for a house. For better or for worse, home ownership is something that most individuals aspire to, and everyone has an opinion on the real estate market (even people with no knowledge of other asset classes).
If you start to think about your stock investments in the same way that you would think about buying a rental property, you will find it a lot easier to adopt Buffett’s long-term approach. Would you seek out daily price quotes for a property that you own in order to be up to date with the market? Of course not. There is a general acceptance of the idea that the exact price of a property will tend to fluctuate around some range, and that it would be pointless to update it every second. But when it comes to publicly traded companies, everyone loses their mind when Amazon (NASDAQ:AMZN) trades down 3% in a day.
This tendency to treat stocks differently from real estate is pervasive and leads, in my opinion, to rampant short-termism. Investors need to close this mental gap. Only then will they be able to view price declines as buying opportunities, and not as reasons to panic.
Disclosure: The author owns no stocks mentioned.
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