When Is Investing Like Owning A Business?
Many people explain stock market investing similar to owning an actual business, because in essence, when you buy and hold a share of a company, that is considered ownership. Well, in today’s market with thousands of trading strategies, I definitely don’t consider all forms of stock market activity “ownership.” Let’s look at this idea a little further.
When you consider starting a business or maybe buying a stake in a business, what is your motivation? I believe most people buy into a business because they believe in the business model and they believe there is a significant opportunity to generate cash. As a business owner, you’re buying that cash flow. If you’re looking at rental real estate, this is more clear, but sometimes in the world of business, it’s not as clear for others.
If you follow this concept through, you can see I’m leaning towards dividend stocks. Dividend stocks pay you out a regular cash flow, similar to owning a cash-flowing business. When you invest for dividend yield, you get a return on your investment throughout your ownership. Once a cash flow has been paid to you, you can’t lose that. Contrast this with holding an investment for speculative purposes, hoping for a higher price down the road.
So, when do you sell a business? For some (Buffett-style), it might be never. The business might be such a fantastic business that you want to own it forever and collect cash flows from it indefinitely. If you’re in a business owner mentality, the only time to sell the business in my opinion is if you get a massive offer that is above and beyond its value. This can happen with businesses and it can happen with stocks as well. If you’re holding a dividend paying stock and the market is in a major bubble or severely overvalued, you can consider selling your position or part of your position. Other than a circumstance like that, if you’re focused on being a business owner, you probably don’t want to sell your position.
If you’re operating a business, you might need tools such as money management software, human resources tools and other items that will help you be an effective business owner.