The stock market looks like an intimidating place — at first.
For new investors, you might feel like you’re in a pinball machine.
There is lots of information flying from all directions.
There are flashing numbers or minute-by-minute news demanding your attention.
You want to move forward but you’re being bounced around without getting anywhere.
This experience can be confusing.
Like being in a giant pinball machine.
But it DOESN’T have to be that way.
You’re not buying stocks, you’re buying a business
Meet Warren Buffett.
Buffett knows a thing or two about investing.
He is widely regarded as one of the best investors of our generation.
Here’s the thing …
Unlike the talking heads on TV, the Oracle of Omaha doesn’t pay attention to daily stock prices.
In fact, in a 2014 CNBC interview, Buffett said that he has no idea what the stock market will be doing next:
“I have no idea what the stock market’s going to do tomorrow or next week or next month or next year”.
To be sure, it’s not that he is not paying attention to his stocks.
The difference comes from what he prefers to spend time on …
… and it is not stock prices.
Buffett sees his stocks as ownership in a business:
“If you own your stocks as an investment—just like you’d own an apartment, house or a farm—look at them as a business.
“If you’re going to try to buy and sell them based on news or something your neighbor tells you, you’re not going to do well.”
Likewise, in Singapore, when you buy the shares of Sheng Siong (SGX: OV8), there’s a chain of 66 stores around Singapore behind the ticker symbol.
This is the business that is frequented by Singaporeans from all walks of life for their daily needs.
The cash that it collects from selling produce and goods to customers becomes its revenue. Keeping expenses low helps Sheng Siong earn a profit.
When a company is able to bring in more cash than what it spends, it has excess cash that it can share with shareholders like you and me.
These are some of the things that Buffett spends time on.
It’s NOT the stock price but happenings in the business he is interested in.
Staying focused on the business
The photo above is a snapshot of Buffett’s office in Omaha, Nebraska.
For a billionaire, Buffett’s desk looks rather plain.
As you take a look at what you can see, consider what you DON’T see.
There are no computers.
There is no television screen that spits out stock prices by the second.
No radio blaring out the minute by minute happenings at the stock market.
Of course, there is no Twitter or Facebook feed as well.
Buffett DOESN’T need any of that.
That’s because he spends most of his time reading, away from the distractions of stock prices and minute by minute TV commentary:
In 2000, he addressed a group of MBA students on how to become a great investor:
“Read 500 pages like this every day.”
“That’s how knowledge works. It builds up, like compound interest.
All of you can do it, but I guarantee not many of you will do it.”
The truth is, many of you can be investors if you spend our time wisely on the right things: the business.
For Buffett, most of his time is spent reading up on businesses daily.
We’ll do well to follow his lead and do our homework before we buy a stock. Looking up share prices doesn’t count.
Know what you don’t know
The final lesson comes from a plain-looking file bin on Buffett’s desk.
At first glance, it looks like an inbox.
Except that it is not.
Buffett’s file-bin has two simple words: “TOO HARD”.
This is the tray where Buffett tosses investing ideas or businesses that are deemed too hard to understand.
Now, pause and re-read the last sentence again.
Let that sink it for a moment.
Remember, Buffett is considered to be one of the most successful investors in the world.
And yet, he readily admits there are businesses which have been too hard to understand, even for him.
Therein lies the lesson that brings everything together.
As investors, we should recognise that there is no shame in admitting that a business, whether it is Keppel Corporation (SGX: BN4) or Singtel (SGX: Z74), becomes too hard to understand.
Reading 500 pages a day is not a silver bullet that will ensure that you will master every business out there.
Being a Smart Investor is to recognise what you don’t know in order to narrow the universe of stocks to what you know.
If Buffett can admit what he doesn’t know — you can, too.
Get Smart: The upside to businesses
A big part of why we started The Smart Dividend Portfolio is to create a format that helps investors learn about businesses that have the capacity to pay a dividend.
Through our stock case studies, we show you how we analyse businesses, backed by decades of reading everything from annual reports, earnings releases, executive interviews, AGMs and more.
By building a portfolio of dividend paying stocks, we categorise our stocks into:
- Income stocks, which we see as reliable dividend payers.
- Growth stocks or stocks with the capacity to increase their dividend payouts.
- Speculative stocks or new ideas we are testing out — this makes up a small proportion of the portfolio.
Our intention is to create a curated buffet of case studies which will help educate investors on how they can identify good dividend paying stocks and how to categorise them.
This could be the fastest way to jump from a “newbie” investor to a seasoned pro. Our beginner’s guide shows everything you need to know to buy your first stock and beyond. Click here to download it for free today.
Disclaimer: Chin Hui Leong owns shares of Sheng Siong.