I'm investing in a stock, not in a business

Many investors will never pause for a moment to think about the business of the company they are willing to bet their money on. Many will just put their money where their brokers, friends and associates will tip them to. But no investment - however attractive the entry point - can outperform the underlying business, especially in the long term. This is one truth that escapes most investors. Busting the myth Many investors do not realise that more than being a successful stock picker, Buffett is a successful business buyer. His success has more to do with the wonderful businesses that he owns rather than their stock price movements. Here's what Charlie Munger has to say about how important it is to pick high-quality businesses. "We've really made the money out of high-quality businesses... Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6 per cent on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6 per cent return - even if you originally buy it at a huge discount. Conversely, if a business earns 18 per cent on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with one hell of a result. ('A Lesson on Elementary, Worldly Wisdom as It Relates to Investment Management & Business', Charlie Munger). Ideal type of business Broadly, in the world of Buffett, businesse

This article was originally published on February 25, 2020.