“Although over the short term, Mr. Market may set stock prices based on emotion, over the long term, it is the value of the company that becomes most important to Mr. Market.” — Joel Greenblatt, The Little Book that Beats the Market
Founders start businesses with funding from themselves, friends, and family; later, venture capitalists might invest. If the company grows large enough, it can be taken public to raise more money and investors can buy pieces of ownership, called stock shares.
The value of your stock is–eventually–determined by how much the company makes. If the company prospers, your stock appreciates; if it stumbles, your stock depreciates.
Stock prices fluctuate more than the businesses they represent. Investors–even professional investors–get excited, optimistic, depressed, and despairing, all within years or months. If we can remain equanimous, we can prosper with stocks.
Sometimes we can buy ownership in publicly traded businesses at low prices. On December 2nd, 2022, I bought stock in Laird Superfood, a company with $36 million in annual sales, $17.4 million in cash, and a total market value of $10 million at the time. Two years later, Laird Superfood’s market value climbed to $80 million. (Unfortunately, I sold my shares only a few months after purchase and didn’t profit from the eight times increase in value.)
Look at the shoes you wear, devices you love, food you eat, stores you frequent–you might find a great company whose stock you can buy. Price matters–a great business can be a bad investment if you pay too much.
A business is worth all the cash it will make, forever. A stock is worth the total business value divided by its number of shares. Only buy a stock if its price is half, or less, its value.
If you don’t want to value businesses, buy an index fund–a collection of many stocks pooled together into one investment. For a few hundred dollars, you can own partial shares of all 500 largest U.S. companies including Apple, Amazon, Tesla, Google, Costco.
You need an online brokerage account–like a bank account for stocks. A broker automatically matches buyers and sellers of stocks. I use Schwab.com. Brokers earn interest on your deposits, so stock trading is often free. With this tool, you can create wealth–also destroy it.
Why not real estate, gold, Bitcoin? I’ve started businesses; invested in startups, real estate properties, funds of real estate properties; bought options, gold, Japanese yen. Stocks of public companies are better. Companies produce profits; Bitcoin and gold produce nothing. Companies are managed by others; startups and real estate properties are managed by you. Over the last 10, 25, 100, 200 years, stocks gained the most.
To build wealth: spend less than you earn; avoid debt; invest in stocks.