America's thirtieth president Calvin Coolidge (1872 - 1933) once famously stated that "the chief business of the American people is business." Coolidge did not waste words -- his nickname was "Silent Cal" -- and when informed of his death one wit (Dorothy Parker of Vanity Fair) unkindly asked "How can they tell?" So, people should give even more weight to this phrase from a man of few words.
The phrase is appropriate for investors now. At times such as those we are currently experiencing, when everyone is focused on the stock market and its unprecedented volatility, it is critically important to focus on something we have said several times before: investment should be approached as the ownership of shares in a business. It is very easy to lose sight of that fundamental truth, and its importance to investors.
As we have mentioned, T. Rowe Price preserved his convictions about investment in an unpublished 1973 brochure entitled "A successful investment philosophy based on the growth stock theory of investing."
In it, he noted "That most of the big fortunes of the country were made by men retaining ownership of successful business enterprises which continued to grow and prosper over a long period of years." Further, he pointed out, with emphasis, that "They did not attempt to sell out and buy back again their ownerships of the businesses through the ups and downs of the business and stock market cycles."
If you look at the names published in the Forbes list of richest Americans in any recent years, you will see that Price's observation (which he made in the early 1930s) is just as true today. Do you think that Bill Gates of Microsoft or Larry Ellison of Oracle or the family members of Sam Walton of Wal-Mart have made a habit of selling their shares in those companies at every crisis over the past several decades and then buying them back again when someone rang the "all-clear" signal?*
It should also be comforting that (unlike much of the opinion being batted about in the financial media right now), Price's observations were actually tested for decades in the markets. He wrote, "The author of this study began to work out a theory of investment [in 1929] [. . .] Since 1934 he has tested the soundness of his theory by applying it to an actual fund." By the time he wrote the quotations cited above about the ownership of business, he had decades of actual results to support the soundness of his observations.
During times of market turmoil, the prices of good companies can be hit just as hard as the prices of mediocre or even below-average companies. For those inclined to buy good companies, this can represent a valuable buying opportunity. For those who are already owners, this can be a real gut-check and can raise all kinds of doubts about the future prospects of those companies.
It is certainly appropriate and important to always evaluate the long-term growth prospects of companies to which you have committed your capital. But, it is also vital to remember that the shares you own represent businesses, and that most of those who have made money in business did not do it by selling their stake and then buying it back again over and over through the years.
This truth may seem to be boring, or hackneyed, but that is because it is a time-tested truth. Unfortunately, although many people give lip service to it during easier times, the number of people who are able to follow it during troubled times are much fewer.
* The principals of Taylor Frigon Capital Management do not own shares of Microsoft (MSFT), Oracle (ORCL) or Wal-Mart (WMT).
For later posts dealing with the same topic, see also:
- "Invest like Mr. Howell" 05/18/2009.
- "Solid convictions versus snake oil" 01/08/2010.
- "Another black swan?" 05/13/2010.
- "The dance of the hippos" 08/10/2010.
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