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Quote:Q: Buffet realized that buying businesses is much better than buying stocks? As in, are businesses like more profitable or weather-proof than stocks which can fluctuate up and down because of some news.
Buying a business and buying a stock happen to be exactly the same thing. A stock is a part ownership in a business, nothing more, nothing less. It just happens that if it's listed on a stock exchange, it's easier to buy and sell than an unlisted company. The price of a listed company can fluctuate wildly. Its value does not.
Traders treat stocks like inventory - they buy in order to resell. Investors treat stocks like assets - they buy in order to use. For inventory, the selling price is of prime importance. For assets, the utility (cash generation) is of prime importance. Are you a trader, or are you an investor?
Buffett buys a lot of unlisted companies for several reasons:
1. If word gets around that he's buying into a listed company, the price of the stock shoots up, raising his cost. No such problem with unlisted companies - he's often the only bidder.
2. Not all good companies are listed. Some of the best companies are privately held.
3. He can name his price without worrying about the benchmark (public price).
Listed shares are advantageous to an owner only in terms of liquidity - he can easily dispose of his shares as he sees fit. If, like Buffett, he has no intention of selling, there is no advantage to having the company being listed. The company's operations are not affected by its status as a private or public entity.
Being listed does not improve the profitability of a company - in fact it is actually negative because of the additional cost of compliance with disclosure requirements. That's why many tightly held companies end up going private again - it's not worth paying thousands of dollars annually to maintain the listed status just because of a few minority shareholders. Better to just buy them out and delist - the savings are often substantial.
For better clarity, "businesses" should be read as "private companies".
There are distinct differences between company, stock and business.
A company is a legal entity and is a house for everything - the business(es), the non-business related assets and liabilities, its tax position, subsidiaries, the people it employs and that can be non-business related as well.
When you buy a company, you get everything, including the things that you don't want. If you want to buy only the business without buying the whole company, stocks is not the way to do it.
E.g. Eastern Holdings.
It had a very good Event business but the company has also a substantial amount of properties. So buying the stock to get the Event business is not a 1:1 relationship. One has to weigh the effect of the "contamination". As we witness, SPH bought the business without buying the company. (Ignore the fact that the business is housed under a subsidiary, but the whole idea is the same.)
The ownership of a company is divided into the stocks. However, owning the stock does not mean owning the company. To really own the company, you need to be able to exercise control.
E.g UIC.
Who is the owner of the company? Shareholders collectively own the company, theoretically yes. But why are the 2 tycoons fighting between themselves? Because only when you have control, you can dictate what you want to do with the cash and assets in the company.
Warren Buffett likes to view stock ownership as company ownership because he has the resources to take over the control and cut off the non-business related portion if he wishes to. Retail investors may not be capable of doing it.
The present ownership structure may also prevent you from doing so even if you are well financed.
E.g. Portek.
If the current controlling shareholder refused to sell, the buyer gets only the stocks but not the company.
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This is to record my gratitude to d.o.g.. I don't know what I will be doing if I had not read his writings. If one is lost after reading Graham and Dodd, Fisher, or Warren Buffett, he should read d.o.g..