Stock in the stock market is a share in the ownership of a company. It’s no different from being a partner in a company we invest in with our friends. For example, Company A has a total of 1,000,000 shares. If we hold 10,000 of Company A shares, it means we have a 1% partnership stake in this company.
And it also means we are entitled to 1% of the rights to Company A such as the right to assets, the right to dividend, or the right to vote on certain matters.
If Company A is listed, we can trade those 10,000 stocks we own in the stock market. The proportion of the stocks or rights we have in Company A will increase or decrease by the number of stocks we have traded.
Therefore, behind the stock symbols we see in the stock market such as GOOG , CMG, ROST are companies that operate real business.
Those companies are managed by real individuals, earn their income and profits, and own their assets just like the businesses we see daily. For example:
- GOOG is Google Inc which dominates the market share of search engine worldwide.
- CMG is Chipotle Mexican Grill Inc which owns thousands of Mexican restaurant throughout United States.
- ROST is Ross Stores Inc which operates thousands of the off price department stores nationwide.
We can buy these companies’ stocks and acquire a partnership stake in each company through our investment in the stock market.
The above example is an investment in Fastenal Company which operates construction supply business in the U.S. Over 25 years, the company grew from hundreds to 2,600 branches. And clearly, the more branches, the more Fastenal income and profits grew each year.
If we had invested in Fastenal (FAST) stocks back in 1987 at $9,000 and simply held on to them during the company’s consistent growth, after 25 years, our $9,000 investment would have increased to $4,478,400 or turned a profit of 49,660% (calculated as 28.2% compounded interest per year). That is a massive profit.
Or in the case of Sherwin Williams, this wonderful company which sells various paint and coating products made consistently growing profits and paid higher dividends every year. We need only to buy its stocks at a fair price and hold on to them; the dividends paid out in just a few years would exceed the invested principal. And the wonderful thing is, after we had fully received the invested principle, we would still keep getting the dividends for the rest of our life. Also, the stock price would certainly be bound to rise many folds.
It’s no different from owning a great property to let out. We could raise the rent every year and earn higher income every year while the property value would also keep increasing every year.
In the investment world, we need the knowledge in finance and the ability to read financial statements in order to determine which companies are wonderful. A company’s financial statements typically include an income statement, a balance sheet and a cash-flow statement.
Most people are unable to understand the business through financial statements, and therefore unable to decide which particular stocks among many in the stock market represent wonderful companies.
Even though we can identify the great companies, but if we can’t determine their business value, we might pay too much for their stocks and stand a chance of losing money.
To determine a company’s fair value, we need to understand its financial statements. We also need an understanding of various businesses as well as a valuation skill, which takes a long time to acquire and tends to be difficult for people outside of financial industry.
The last problem is the time needed to follow every quarterly financial statement updates. As business changes all the time, even a wonderful company can falter when new competitors show up. Take Blackberry for example; the former top smartphone provider in the world can now hardly sell its products. Therefore, besides the financial statement analysis and business valuation skills, investors must spend a considerable amount of time keeping track of the performance of every company they invest in. That’s why people who don’t have that much time are unable to follow this principle.
Above Jitta Line
Above Jitta Line