When I say "stock," what comes to mind?
If it's one that you own, do you think of a chart that is hopefully moving upwards? If it's one you're thinking about owning, do you think about how a few important numbers and metrics stack up against those of its peers?
One of the greatest investors of all time -- the one and only Warren Buffett -- looks at stocks in a way that is easy to understand yet incredibly hard to manage. But his strategy is one we should all remember when we think about the stocks we own and the ones we're thinking about investing in.
If you think tenths of a percent aren't important, ponder this math: For the four companies in aggregate, each increase of one-tenth of a percent in our share of their equity raises Berkshire's share of their annual earnings by $50 million.
And that brings us to our second point: It isn't just the ownership stake that matters, but the actual results of the company that is owned. Buffett went on to say:
The four companies possess excellent businesses and are run by managers who are both talented and shareholder-oriented. At Berkshire, we much prefer owning a non-controlling but substantial portion of a wonderful company to owning 100% of a so-so business; it's better to have a partial interest in the Hope diamond than to own all of a rhinestone.
As a result of both increased ownership and the continued success of Buffett's "Big Four," the portion of earnings available to Berkshire -- although only the dividends paid out show up on its financial statements -- has grown dramatically since 2011:
We expect the combined earnings of the four -- and their dividends as well -- to increase in 2012 and, for that matter, almost every year for a long time to come. A decade from now, our current holdings of the four companies might well account for earnings of $7 billion, of which $2 billion in dividends would come to us.
And while the earnings growth of the Big Four may not continue at its recent pace of more than 15% annually, $7 billion may even be a dramatic understatement.
The key takeaway
As Buffett's famed mentor Benjamin Graham said in his seminal book The Intelligent Investor : "Investment is most intelligent when it is most businesslike."
Ultimately, intelligent investors mustn't view stocks as numbers on screens or charts moving up and down, but as businesses. We must largely ignore movements in stock prices and evaluate the fundamental business dynamics, knowing that over time stock prices will reflect changes in underlying fundamentals and the results of the business.
For example, since Chipotle went public on Jan. 26, 2006, its stock has moved up or down by 5% roughly once every four weeks, or 132 times. But those investors who have patiently waited, ignoring the price gyrations and trusting in the company's hugely successful business, would have seen a $1,000 investment grow to nearly $14,000 at the time of writing.
Source: The Motley Fool.
Examples like this show why Buffett once remarked, "The stock market is designed to transfer money from the active to the patient."
Does this mean you should simply pour money into great businesses? No, because, as Buffett has also said, "A business with terrific economics can be a bad investment if the price paid is excessive."
But we must see that whenever we make an investment, we must always consider it part-ownership in a company, not simply a stock. Buffett does, and so should you and I.
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The article You'll Never See Your Stocks the Same Way Again! originally appeared on Fool.com.
Patrick Morris owns shares of Berkshire Hathaway and Coca-Cola. The Motley Fool recommends American Express, Berkshire Hathaway, Chipotle Mexican Grill, Coca-Cola, and Wells Fargo. The Motley Fool owns shares of Berkshire Hathaway, Chipotle Mexican Grill, International Business Machines, and Wells Fargo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
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