Several years ago I was in a training seminar and the speaker, who was an engineer with an attitude, an edge about him, was talking about the properties of concrete. At one point he got very passionate as he explained how you should never call it “cement”. In fact, he got pretty irate as he lamented how uninformed people call it cement, emphasizing how cement is only one of the ingredients of concrete and not concrete itself. He said that this would be the same as calling a cookie “flour” when flour is only one of the ingredients of a cookie and not a cookie itself.
The same idea can be applied to all the investment gurus and everyday people out there who use the word “stocks” nearly all the time as their way of referring to companies that trade shares on stock exchanges. So as not to be labeled a hypocrite, I freely admit that I do this often throughout this blog without first thinking.
It isn’t as though using this term is a bad or a harmful thing in and of itself, but I think that it can contribute to harmful perceptions that can produce harmful results. Calling them “stocks” instead of companies seems to partly reflect a wrong connotation about what the real idea and purpose of a stock market is. To me, the term “trading stocks” is like shuffling poker chips around when one is gambling. One of the misconceptions about the stock market that causes me to lament is the idea that it’s like a big casino, except that one is gambling on finding a fast-rising company much like betting on the outcome of a card deal or a roll of the dice.
It is uninformed people who misunderstand the idea and purpose of the stock market. Trying to educate people otherwise is a primary motivation for writing a blog like this because if they could only know the potential of what the stock market has to offer – as I’ve experienced first-hand – then it could change their financial situation for the better, perhaps even dramatically. It pains me to see people caught up in lies and misconceptions, so I spend a few hours per week in the hope that even one person in cyberspace can have their life turned around by applying even one of the eye-opening lessons that I’ve learned over the years. I’m not claiming that most of these are original (only some of the ways I present them are), I just hope to present them in a way that makes sense and thereby also makes a difference to somebody.
It pains me to see people caught up in lies and misconceptions, so I spend a few hours per week in the hope that even one person in cyberspace can have their life turned around by applying even one of the eye-opening lessons that I’ve learned over the years.
Gambling vs. Investing
Unfortunately, the idea of a big casino creates the perception that “playing” the stock market is a way to make some quick money. What almost always happens is that the uninformed person who approaches the market in this manner almost always loses most of what they put in and thus the lie that the stock market will only lose you money gets unfairly perpetuated by uninformed people. People only seem to like bad news and so you almost never hear about the everyday, next-door-neighbor investors who do quite well in the stock market, some of who are the ‘millionaires next door’. I’m related to three such people with several more years of experience than I have and so I know that the market works when you approach it correctly. The uninformed simply don’t understand what I’ve described in other posts: the stock market is not a shady scheme to get rich quickly but rather a legitimate vehicle to grow wealth slowly.
I’ll readily admit that about a decade ago, I was first lured to the stock market because I was uninformed. I wanted a quick ‘out’ to the life situation that I was in. I didn’t want to work in my particular industry any more and had no attractive options and I thought that getting “rich” with stocks was the way out. Less than a year later, I learned the very hard way that approaching stock investing in this manner, which is actually gambling as mentioned above, is a sure-fire way to lose money in the stock market.
People only seem to like bad news and so you almost never hear about the everyday, next-door-neighbor investors who do quite well in the stock market, some of who are the ‘millionaires next door’.
Only after several years did I finally have a paradigm shift as to what its true purpose is. As a result, I make very ‘solid returns’ on most companies that I invest in, enough to far outweigh the losses of my few losers (which even the best investors have from time to time). Only by having a very long-term mindset can one achieve such returns, a mindset of seeking to slowly build wealth over the course of several years and not a day-trading or get-in-and-out-quick or buy-low-sell-high ‘time the market’ mentality.
Stocks vs. Companies
What helped me with this paradigm shift was not only the harsh life lesson of getting slammed due to my wrong perception of the stock market a decade ago, but also doing a lot of reading and thinking since then about what stocks and the stock market and investing in them really are, not what the media and other uninformed people think they are.
So let’s get back to basics. Let’s start with the definition of a stock. The Apple Dictionary defines it as “the capital [wealth in the form of money or other assets] raised by a business or corporation through the issue and subscription of shares.” Merriam-Webster defines it as “A share of the value of a company which can be bought, sold, or traded as an investment.”
Notice the common theme in these and other definitions of the term “stock”. Namely, it is simply a share in the ownership of a business/corporation/company, or put another way, a ‘piece’ of that business. Whether buying one or ten or one hundred shares of a company on a stock market exchange, you can become a part-owner of a piece of that company. This is the greatest financial advantage of living in a capitalist society and yet most people never realize this in their lifetimes! Many of them hate on corporations (and fear the stock market) instead of benefitting from their success as part owners!
Becoming part-owner of a company on a stock market exchange is the greatest financial advantage of living in a capitalist society and yet most people never realize this in their lifetimes!
Viewing what a stock was in this way helped me to understand that I wasn’t merely passing some chips around or rolling dice. I was learning that I needed to invest with a time horizon that is long enough for the thousands of decisions made every day by companies selling shares in their company on a stock exchange to have time to play out. I was no longer just picking any company to invest in, I was learning to research a company of interest before putting a measure of faith in the vision and experience and competence of its leadership by buying some shares in that company. I was learning how to invest and no longer gamble.
The Final Word
Now that I’ve had a few years to watch the plans of some of the companies I’ve invested in come together, it’s been exciting to be along for the ride. No company develops a great smartphone or a successful drink recipe or a popular app/software platform or a retail empire overnight, let alone over the course of a few days or weeks, yet most people invest that way. Think about just how many meetings and hours it has taken and how many smart decisions have had to be made by a company that has grown large enough to be listed on a stock exchange! Just like such companies will plan these things and ideas over the course of sometimes several years, so it will take sometimes several years for these developments to be successful enough to be reflected in a rise in a company’s stock price.
No company develops great things and ideas overnight, let alone over the course of a few days or weeks, yet most people invest that way.
So the next time an investment analyst or investing subscription service like The Motley Fool a blogger like me refers to buying “stocks” or to investing in “stocks”, first of all forgive us(!) but also take a moment to remember that there is a lot more to that than the term suggests. Think about the time involved for the vision and plans of a typical company to come together and maybe that will remind and encourage you to take a similar approach to how you invest in that company.