Investing Like a Business Owner

Rob Vinall is one of the top performing fund managers in the past decade and a half.

Vinall manages a fund named the Business Owner Fund. Since inception 15 years ago, the Business Owner Fund has returned 589%, or an annualised rate of 13.7%, in euro terms. One thing about Vinall that stands out to me is that as his fund’s name suggests, he strives to invest like a business owner.

Too often, investors look at stocks as just prices that move up and down and make investments decisions based on these prices. They often forget that there are businesses and cash flows behind these stock prices and stock tickers.

Imagine you are starting a restaurant business. There are two big financial numbers you need to consider before you start. They are: (1) how much do you need to put into the business and (2) how much can you get out of it over time?

For instance, let’s say the initial start up cost is $1m. But you can take out $200k in dividends every year after that for the next 20 years. Knowing these projections, you can decide if it is worthwhile to start your restaurant business. In the above projections, you can calculate that over twenty years, you would have quadrupled your money.

Investing in stocks should also involve the same thinking. How much can we get out of the stock over the lifespan of the business? That means, how much in dividends per share can we get over the lifespan of the business and will that cover the cost that we spend on buying the shares.

A business owner who owns her own restaurant may not have an opportunity to sell the restaurant. As such, the only way to receive any returns is from the profits of the business. This means that the business owner naturally places emphasis on ensuring the profits that the business can generate exceeds how much she puts in.

On the other hand, when we invest in stocks, we can sell the stock. This is both a blessing and a curse in my opinion. It’s good because it provides us with liquidity if we need the cash. But it’s bad because investors then tend to focus on the stock price and not the business fundamentals.

Like a business owner, stock investors should be focused on the cash flow of the business rather than its share price. This means looking at the future cash flow per share, and ultimately how much dividends, they can receive over the lifespan of the business.

In the long-term, while a company may not be paying dividends yet, the earnings and cash flows allows a company to eventually dish out dividends, which should offset the amount you paid for your investment and more.

Investing in the stock market should be similar to being a business owner. We should focus on how much profits a company can return to us instead of how much we can sell the stock at a future date. 

The quoted stock price on the stock market can fluctuate wildly and will depend greatly on external factors such as the risk free rate or how Wall Street views the company. This can distract us from what is truly important and why we really invested in the company.

By focusing on the cash flows of the business, we can more safely predict our returns instead of being beholden to the externalities of the environment that may impact our sale price.

Ultimately, just like a business owner, we should focus on our returns from the dividends instead of wasting energy hoping that the share price goes up. This is often outside our control and if it does then great but if it doesn’t, it shouldn’t matter as the overall returns from our cash flow should be good enough for us to make a positive return.

Note: An earlier version of this article was published at The Good Investors, a personal blog run by our friends.

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Disclosure: Jeremy Chia does not have an interest in any of the companies mentioned.

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