What most of us buy when we think of investing in the stock market is a a share or a stock certificate. These used to be issued as a physical piece of paper, which is how they got their name. Now of course, this is done electronically. Generically, these shares are known as financial securities. There are two main types of financial securities:
- Equities: A share of ownership of the company that issued the shares. As an owner of shares you become a shareholder of the company that issued the shares. This means you now own a part of the company in proportion to the amount of shares you own compared to the amount of shares the company has issued.
As with many things in life, there are complications, yes even with shares, and that’s because there are different types of shares; mainly common and preferred.
In this article and for the vast majority of our investing discussions we will be dealing with the basic common share, unless we say otherwise. Preferred shares are the other main type of share. We will address that topic another time, probably. - Debts: A financial obligation of the company to you the lender. As an investor you would be buying a bond and referred to as the bond holder. And just like with any other loan, the borrower (the company issuing the bonds) has the obligation to pay you, the bond holder the interest and then the principle based on the terms of the bond (aka as the loan agreement).
And just like with equities, this category of securities also has plenty of complications. But we are not delving into that topic today. We will address that topic another time too…maybe.
For many of us, a common share is something that we purchase and then anxiously expect, hope, pray and cheer that it goes up immediately after we buy them. If you reread that last sentence 3 or 4 times, and preferrable out loud, it will become pretty self evident that those expectations and desires are not reasonable no are they rational. We will be writing a lot about how we can help you change your thinking.
A common share is simply a part ownership of a company. So as an owner of a company that you just bought a portion of, you should be thinking in terms of the next 5 to 10 years, and even more. In fact professional lenders (usually banks) and professional investors alike, require companies to have these longer term plans prepared for their review and scrutiny before they will approve any lending or investment decisions. You certainly should not be thinking about seeing tangible results over the next few months or weeks, let alone anything less.
What a share is not is simply a ticker symbol that goes up and down in value, through a seemly random process over the course of each day, week and often months.
It may help if you imagine that you are now the partial owner of a business within your own community, rather than an owner of a publicly traded company. As this partial owner, you would not be measuring any changes in the value in your ownership interest over a period as short as the next few weeks or months. And you certainly couldn’t check your stock quote every second of the trading day and believe me, that’s a good thing.
For good things to happen at a company, it takes adequate financial resources, a lot of diligent effort and a sufficient amount of time from the hard working people at the company. For context, just think about any company or organization that you worked for and think about how long it took to successfully implement some the company’s plans. You should not expect anything different from any publicly listed company that you invest in because those companies are made up of people just like you and me. Seasoned owners and operators of companies know that in most cases it takes several years for their plans to bare the rewards that they had planned for long before.
So when you buy shares in a company you must remember that you are an owner of that company and your interests, expectations and rewards are aligned with all the other owners of that business.
When investing, you must think long term to be successful. The longer you have for your investments to run their course, the higher probability you have of achieving positive returns. As a general example the SPY (I will often use the SPDR S&P 500 ETF Trust (SPY) in examples as a proxy for the stock market as a whole) reached a high around October 2007 and didn’t reach that level again until 2012. That was a long 5 years for holders before they saw any price appreciation. But this is exactly what happens in business from time to time. And not just maybe, this will happen to you during your investment life time. I am certain of that.
But fast forward to today and the SPY is now at 3.3 times higher than it was at the high of 2007. And for those of you that are interested, that equates to about an 8.35% annual rate of return, not including the dividend, and that’s despite the horrible timing used in my example.
So please, don’t expect good returns in a hurry. Intuitively, we all know that good things, including the creation of value by hardworking individuals at a company, including one that you are now an owner of, takes time to be created and sometimes even more time to be recognized and appreciated by many, with a reasonable and appropriate valuation.
A key part of being an intelligent investor is patience. So when you invest in shares of a company, give your investments plenty of time and you will be rewarded.