Improving Investor Behavior: Mind Your “Owned” Businesses

What is Google worth? Most finance people would look up the share price, about $1,100 and multiply it by the number of shares to find what the company is currently “valued” at – about $790 billion. But does value always equal precisely what a company is worth?

If Google were to go out of business tomorrow and have a fire sale, offering up everything they have from patents to buildings, desk chairs to web servers, the total output would be significantly less than $790 billion. Likewise, if they were to announce a fully autonomous car, the value of the company could go up, likely by a significant amount.

The “worth” of a company goes beyond what it is presently priced at, to what the price could be in the future. Investors look at a company, say to themselves, “I like what they’re doing, and I expect them to grow in the future,” so they invest. They factor in a mix of intangibles: prospects for growth, risks, market conditions, and even a dash of hope, then decide to purchase a piece of that company. Collectively these purchases form the current share price.

I believe it is far more essential to evaluate your investments based on what we call the intrinsic value or what we consider an investment to be worth, rather than its current price. The current price is what I might be able to buy or sell the investment at a given moment. It has nothing to do with the actual value of that investment.

Described another way, the current price of a company either overstates or understates the real value of that company at any given moment. Sometimes the price can swing dramatically, all while the company continues to do what it does every day – find value for its customers or clients. When the price gets too out of step with the value, it can be an opportunity (or a bubble).

We try to differentiate the value of a company (worth) versus the price. When you focus on the value of the company, your judgment is far more intelligent. You can determine whether to buy more because it is under-priced, hold it, or sell it because it is over-priced or the prospects for the future are no longer attractive. Price is simply what you could buy or sell at the moment.

Price is easy. We can look it up anytime and anywhere. The hard part is understanding the value of a company. There are many tools available that offer some insight: PE ratios, book values, and so forth. But there’s more to it than that. It takes judgment, insight, research, and experience. Often smart investments require a commitment to go against the current pervasive view. If a company is currently out of favor, it takes wisdom and experience to determine if the reasoning behind a sell-off is warranted, or instead an overreaction.

Market prices are always in flux, which can be a significant distraction. So instead, we prefer to look at the fundamentals, the operating results of companies, cash flow, earnings growth, and most important: dividends. A track record of consistent dividends is perhaps the best measure of a companies health. When they increase their dividends (which happens to be our focus), that exudes confidence that the leaders of the company have for the future prospects of the company. Dividends are always positive; price fluctuations may be positive or negative. Wise investors trust fundamentals more than the emotionally charged, day-to-day market or price behavior.

A majority of investors focus entirely too much time and attention on their account value rather than the income from their investments. They give little consideration for how well a company is doing, but instead focus on the current price and news narrative. Spending too much time attempting to predict what is going to happen, including both economically and politically, is often not a good use of your time and energy. Forecasts of economics and implications rarely turn out to be accurate; they are unpredictable and most often a waste of time. As Warren Buffet said in the 1994 Annual Berkshire Hathaway report, “We will continue to ignore political and economic forecasts which are an expensive distraction for many investors and businessmen.”

In summary, mind your owned businesses. Investors should seek to understand the value of their investments, not their current price. You will be a better investor if you check your actual dividend income every 90 days rather than checking your value every 90 minutes. It may not be as exciting as watching the daily fluctuation occurring on Wall Street, but bore me to death with rising dividend income and I’ll die a happy man.

With the most recent daily volatility, this might be a helpful article to save and re-read when prices fluctuate.