We Think Like Business Owners

“In thinking about market behavior, I find Warren Buffett’s apartment house analogy particularly helpful in understanding how to approach public equities. Imagine you own a well-located apartment building that reliably brings in rental income year after year. Now imagine that every day, a stranger knocks on your door offering to buy the property—some days at a laughably low price, other days at an absurd premium. You wouldn’t feel compelled to sell just because someone quoted you a number. You’d continue collecting rent, maintaining the building, and letting the value compound over time. Only if the offer became wildly attractive would you consider selling.

As a securities investor, this is precisely how we should think about owning stocks. A share of stock represents partial ownership in a real business—just like owning a share of an apartment house entitles you to a portion of the cash it generates. The market’s job is to offer you prices; your job is to decide whether or not to act. Most of the time, the wisest thing to do is nothing at all. Like the apartment owner, you should focus on the long-term economics—rents, upkeep, location, tenant quality—not the daily whims of passersby. Let others shout prices. Your advantage lies in ignoring them until one day, the price is just too good to refuse.”

— Armin Shoar