S&P 500 As A Business

The most important assumption for a strategic (buy and hold) stock investor is that it’s futile to predict and capture short and intermediate term stock movement. Owning a stock means that you become a fractional shareholder or owner (among other fellow shareholders) of this company. You should ignore stock price movement and focus on its underlying business. Put it another way, you should assume that you are investing in a private business such as a restaurant in your town. The only times you should look at stock price are the times when you buy and when you sell. The time horizon to hold this stock should be a long term, or as we previously studied and advocated many times, 20 years or longer (see, for example, March 18, 2019: The Risk Of Stock Investing). 

Warren Buffett has tried to convey this concept but unfortunately, as he said, some people get this idea instantly and many struggled forever. The culprit, of course, is that there is this stock exchange/market that constantly prices your stock any second and it’s extremely hard not to be affected by such appraisal. 

We have always advocated investing in a low cost stock index fund such as S&P 500 index (like VFINX (Vanguard (S&P 500) Index)). Investing in an index fund is no different from investing in a business, except in this case, it’s an aggregate conglomerate: an S&P 500 index is a collection of 500 (sub)businesses. In this newsletter, we want to examine this concept more closely.