Businessman Investor

Touching base with the rational business psyche of stock market investors

Tuesday, August 9, 2011

Long-term Roots of a Stock

The idea of a stock market price is precisely just that—it is something you have to pay for. You pay a price in exchange for something, which in the stock market’s case, a business. Following this line of thought, when you buy something, the intention, naturally, is to consume the product, or to benefit from its intended purpose—from its essence or reason for being. In the context of an investor, when he buys shares of stock, what does he, as a buyer of business, expect?

Or shouldn't we ask first: what is the essence of a business? This is perhaps one of the most important economic questions a capitalist might ask. Here’s my take and this is only my view: the fundamental essence of a business is to consistently create shareholder value by providing products and services to continuously satisfy customer needs and wants. Hence, while the investor is compensated by profits, ultimately, the reason for being of a business is for the benefit of the ever-demanding customer. This purpose and commitment of enduringly accommodating needs and wants of customers binds that long-term quality of a business. As a result, it symbiotically becomes a perpetual repeat business—to put in a self-interested note, or from a candid layman’s view, a money-making machine.

Billions and billions served. People recognize McDonald's long-term business value not because its stock price soared, but because of its quality service and the endless huge profits it churns out. Its value is simply rooted in its fundamental business profits which is made consistent by continuously satisfying its customers' needs and wants.
The long-term nature of a business can be rooted from the symbiotic relationship between the profit-motivated investor, and the ever-demanding customer who has unending needs and wants. This relationship leads to the creation of shareholder value driven by fundamental business profits derived from the sale of products and services intended to satisfy customers—the very essence of its internal wealth-generating faculty. Thus, the investor, as a buyer of business, should buy and 'consume' a stock for this intended purpose of owning it indefinitely (just like your family business, if you have one) and deriving gains from it through business profits (as opposed to a quick capital gain exploitation). This only gives him peace of mind and serves him well since fundamental profits, being derived from repeat business, are continuous, long-term, consistent, predictable, and ever compounding. It is only therefore apt to conclude that businesses are naturally long-term. Thus, stocks, by their very nature, are long-term.

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The information presented here is for educational purposes only. Under no circumstances should it be construed as a recommendation to buy, sell, or hold any stocks. If you choose to use this information, you do so at your own risk.

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