In my recent Tips To Achieve Investment Success post, I touch upon why it is important to think like an owner when investing.
Shares are not mere pieces of paper. They represent part ownership of a business. So, when contemplating an investment, think like a prospective owner. - Warren Buffett
Many shareholders totally miss the point of investing. They 'trade' simply because the 'stock price is up'. This is irrelevant, however, to the long-term value of a business. When accounting for tax implications, trading makes the frictional costs even more damaging to long-term returns.
As luck would have it, Bruce Flatt's (CEO of Brookfield Corporation) February 13, 2025 Letter To Shareholders touches upon this very subject matter. In his letter, he explains the mindset of an owner versus a renter.
There is a psychological phenomenon in most humans which results in caring a lot about what they own but caring less about something they rent. Consider the car you own and the care you take not to go too fast over speed bumps, for example. Conversely, rental cars are driven with much less care, and their depreciation is dramatically higher than owned cars. In housing this is even more pronounced; wear and tear on rental apartments is dramatically higher than those that are owned—in fact, buildings built at the same time in the same area with the same demographics find that rentals have 50% more wear and tear than owned.
It is our observation that people sometimes act like owners with their house, but act like renters with their investments. This is one of the great errors in investing. Those who own shares in a listed business have just a fractional ownership; an owner of an entire business sticks with the investment, and he/she believes that reinvestment into the business creates value and that over time the cash flows will grow. If that same business happens to be traded in the market and the stock goes up, this is acknowledgement that others see what a great business you have, but it really does not matter because as a stockholder you are just a fractional long-term owner. By comparison, if you own the apartment or house you live in, you likely would not sell it because someone told you it moved up or down in price. When you have fractional ownership of a business, you own a small piece of that business and so unless you lose faith in the business, there should be no reason to do anything—just act like an owner and watch the business grow.
Of course, decision making comes in because sometimes management teams go astray or business prospects decline. The above is based on the assumption that your management team is hard working and competent. This is important from the outset with an investment, as the future of a business is about not just what you own, but also the investment of the generated cash flow. It is extremely important that you maintain your house, and that management in a company makes good cash reinvestment decisions for you.
Many shareholders act like renters rather than owners, and “trade” simply because they think that the “stock price is up”. This is not relevant to the long-term value of your business, and after taxes, trading makes the frictional costs even more damaging to long-term returns. If, on the other hand, one acts like an owner in investing, then you will watch out to ensure that your management is working hard and doing the right things. However, in the absence of bad decisions being made, you should act like you own the business and just put the shares away in your account. Of course, that is hard with daily quotations everywhere—we realize also that the problem is only getting worse, not better, due to the growth of social media.
Owning a house and a business (through the fractional ownership of a listed entity) are two of the great tax-free ways to compound wealth over the long term. If one can compound owner returns constantly over long periods of time at greater than 10%, the wealth created by being an owner is astonishing. The alternative is renting a residence or renting businesses. Our view is that unless you are one of the very few extremely talented and knowledgeable stock traders, you will surely under-perform as a renter as opposed to being an owner.
Final Thoughts
Many 'investors' think the path to wealth creation is through active trading of the shares they 'rent'. Little do they realize that, unless they are extremely talented and knowledgeable stock traders, this is the path to poor returns.
Owning the fractional ownership of a listed entity for the very long-term is a great tax-free way to create astonishing wealth.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.
