Buy stocks like a businessman

May 27, 2011 by financiallyfreenow

Investing in a company’s stocks is the same as buying the business. Even if we are buying with a small percentage of our capital, we should research thoroughly into the company and value it as if we are buying the whole company. We should also buy the stocks with a mindset that it will feed our family for the rest of our lives (our livelihood depends on this particular purchase). If we do so, we will invest prudently and allocate capital wisely – like a prudent businessman.
Let’s say you are interested in Raffles Medical and let’s imagine that this is not a listed company.  All the qualitative and quantitative criteria are met and we want to purchase it. How do we know how much to pay to purchase the whole business? We would need to look at the financial statements especially the cash flow statements and come up with an intrinsic value of the business. Intrinsic value is the summation of the future cash flow discounted to the present value. With this figure, we would know how much the business is worth and how much we have to pay for it. Now, since Raffles Medical is a listed company, we can check out the current trading price from the SGX website. We can then compare the current price to the intrinsic value of the business. If the intrinsic value is much higher than the current price with a huge margin of safety, we can safely buy into Raffles Medical. This is how to approach buying a stock from the business perspective. Calculating and knowing the intrinsic value of the business we are buying into also allows our emotions to be in check.
On the other hand, purchasing a stock by looking at the 52-week high or low is not the right way to approach stock investing. The 52-week high or low says nothing about the intrinsic value of the business. Stock market is like a voting machine in the short-term and stock prices fluctuate up and down depending on emotions of the traders. Like Benjamin Graham said, purchasing a stock should be business-like and approaching investing from a businessman perspective indicates prudence. Once we have purchased the stock, we must imagine that the stock market has closed down for the next 10 years and not check the prices regularly. It takes time for a business to grow and prosper and the stock price to be indicative of the intrinsic value of the business.
In summary, when investing, always approach investing from a businessman’s perspective and think like a businessman “How much will it cost me to purchase the whole business?”. Also, be in the mindset that your purchase will feed your family for the rest of your life, so there are no chances for error.