When someone owns a quality business, they have to understand that its making money for them and selling real products or services to people or a business. Every share someone owns is a small piece of a real business, so it would be wise to think like a consumer. One has to look at the entire business as if they are buying the whole company. After all, why would you want to own a piece of a business if you wouldn’t want to own the whole thing?
You’re buying a piece of that company’s stores, factories, plants, distribution centers, goodwill, trademarks, products, services, reputation, history, and technology. I take this into account with every investment I make. If I don’t feel comfortable or understand how they make money and how I’ll receive rising dividends as long as I own them, then most likely I will just say no. It’s difficult to be excited about a stock’s depreciation when you don’t really know what you own.
Along the lines of thinking like a consumer I would rather make a bet on more people being alive in 20 years from now, consuming more products from companies like Coca-Cola (KO). I’d also feel comfortable betting that energy will continue to be in high demand as middle classes around the world come about, meaning companies like Chevron (CXV) should continue to profit and pay raising dividends. (Granted oil has been getting smacked the past 2 years!) I also think healthcare is a great area to be in, and businesses like Johnson & Johnson (JNJ) will continue to sell more products in this space.
While it’s not necessarily realistic to know and understand every little part of the business, you should have a basic idea on what they do and how they do it. Know what you own. Know why you own it. If you can’t explain it in a paragraph of what the company does, how it makes money, and why you think you’ll be collecting more money 10 years from now, then you may want to consider whether you should own the company at all!
In the end just act like an owner and think like a consumer. Look at what your fellow neighbor is doing and buying, when I look around someone is always wearing a pair of Nike (NKE) or the local starbucks (SBUX) is always packed. I’am almost certain that these two companies will be around in the next 10 years. If a business is profitable I expect to collect a portion of the profits as a shareholder because I own a part of the business. I don’t work for free either. Whether I’m working or my money is working there should be a paycheck waiting!
Full Disclosure: Long KO, CVX, and JNJ
Work Hard or Work Smart?