Port Wren Capital, LLC
Finding Value InvestmentsSM
A Stock or a Business?
There is a very important quote by Warren Buffett that states, “When you buy a stock, you are not just buying a piece of paper or a ticker symbol. Buying the stock of a company is buying an ownership in a business”.
Many years ago when you bought shares of stock in a particular company you would receive a stock certificate. The stock certificate was a “piece of paper” that certificated the ownership of the number of shares you owned. As a matter of fact we still have one that my brother had. It dates back to July 19, 1988 for 100 shares of Beker Industries Corp. Now a day with the advent of electronic trading most companies don’t issue paper stock certificates. But this is what Mr. Buffet was talking about in case you are new to investing.
The ticker symbol however is still used today. They are a set of characters that represent a particular security listed on an exchange. Think of it as an abbreviation to identify one company’s stock. For example, WFC is the stock ticker for Wells Fargo & Co. (NYSE:WFC) that is listed on the New York Stock Exchange (NYSE).
But the most important part of Buffett’s statement is “buying an ownership in a business.” Once you buy shares you are a part owner of an operating company. And as an investor this is the key to how you must think about investing and thus how you must invest. You must understand how operating companies work as an investor. An operating company has many moving parts and they change over a long period of time. That is why during a time period its revenue and earnings are all working perfectly and the share price is very high. While at other time periods its revenue fall and so does it earnings which makes its share price fall. And naturally there are periods between these two extremes where it is either transitioning from a poorly operating company to a perfect one and from a perfect one to a poorly operating one. As an investor you must be aware that a company’s share price is impacted by each of these various business cycles.
Owning part of a business is very much like owning your own business if you stop and think about it. For example, if you decided to start a business yourself let’s say a movie theater. You would think about where is the best location, who are your customers, what should you charge, what are costs, who are your competitors, who are your suppliers, how should you advertise, what food items should you sell, what are your margins going to be, how much debt do you carry on the Balance Sheet, what do you need in operating cash flow, how are you going to grow the business, should you buy out a competitor or build another building in a different location to attract new customers, etc.
You as a potential stock investor should be thinking in terms of an operating business and not as a piece of paper or a ticker symbol. Knowing that businesses have their ups and downs helps a long-term investor realize that there are better times to invest than others depending on what the situation is with a given company at a given time. For example, we discovered a company called GulfMark Offshore Inc. (AMEX:GLF) back in 2012. They operate a fleet of specialized ships used to transport, material, and people to and from the oil rigs to land over the world. The Wall Street folks told everyone to sell the stock because their revenue was trending down and they were increasing their debt. Wall Street looks at a company’s last three months of performance which is a very short term time and quickly makes a decision on the past. This is a very short time table for a complex operating business and naturally their stock price declined due to the mass amount of sell-off. Also, Wall Street never looks very far into the future of a company. They want to make their money today and move on. However, if you bothered to look into the business you would have learned that its existing fleet of ships were very old and needed to be replaced. They were in the process of taking old ships out of the service which was why the revenue was declining. And they were having new ships built which required them to take on new debt. We realized that this was a temporary situation. We knew that as the new ships came online the revenue would increase and that the debt would decrease. But it would not happen in three months. Therefore, we bought GulfMark Offshore Inc. (AMEX:GLF) stock at $34.25 on 12/21/12 and then sold it at $50.32 on 3/6/14 with a realized gain of 37.99% (APY). Some investors would refer to this type of an approach as a contrarian strategy.
As a smart investor you need to have an understanding of the business that you are thinking about investing in. You need to know why the stock is temporarily out of favor. Plus you need to know that an ongoing company cannot address complex issues over night. It typically takes a few years. As an investor you must be patient for those few years to see your gains become reality.
At Port Wren Capital, LLC, we often find companies that are temporarily out of favor due to a given situation that will bring long-term gains and are patient enough to wait a few years to achieve above average returns. Our subscribers also wish to achieve higher returns realize that time gives the value investor an edge over other investors. So why would you choose to do what all the other investors do and thus settle for just average returns?
At Port Wren Capital, LLC, we specialize in picking specific undervalued U.S. stocks using fundamental analysis developed by Benjamin Graham using a five step process. We have beaten the S&P500, DJIA and NASDAQ benchmarks since we started 5 years ago on our own investments. Discover the difference for yourself. To learn more contact us today.
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