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It's the Business that Matters
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Successful investing is simple, but it's not easy.

One of the big myths of the bull market of the 1990s was that the stock market was essentially a savings account that returned 15 percent per year. You picked up a copy of Fortune, you watched a little CNBC, you opened an online account, and you were on the road to riches. Unfortunately, as many investors discovered "when the bubble popped, things that look too good to be true usually are.

Picking individual stocks requires hard work, discipline, and an investment of time (as well as money). Expecting to make a large amount of money with only a little effort is like expecting to shoot a great round of golf the first time you pick up a set of clubs. There's no magic formula, and there's no guarantee of success.

That's the bad news. The good news is that the basic principles of successful stock-picking aren't difficult to understand, and the tools for finding great stocks are available to everyone at a very low cost—you don't need expensive software or high-priced advice to do well in the stock market. All you need are patience, an understanding of accounting and competitive strategy, and a healthy dose of skepticism. None of these is out of the average person's grasp.

The basic investment process is simple: Analyze the company and value the stock. If you avoid the mistake of confusing a great company with a great investment—and the two can be very different—you'll already be ahead of many of your investing peers. (Think of Cisco at IOO times earnings in 2OOO. It was a great company, but it was a terrible stock.)

Remember that buying a stock means becoming part owner in a business. By treating your stocks as businesses, you'll find yourself focusing more on the things that matter—such as free cash flow—and less on the things that don't—such as whether the stock went up or down on a given day.

Your goal as an investor should be to find "wonderful businesses and purchase them at reasonable prices. Great companies create wealth, and as the value of the business grows, so should the stock price in time. In the short term, the market can be a capricious thing—wonderful businesses can sell at fire-sale prices, while money-losing ventures can be valued as if they had the rosiest of futures—but over the long haul, stock prices tend to track the value of the business.

It's the Business that Matters

In this book, I want to show you how to focus on a company's fundamental financial performance. Analyst upgrades and chart patterns may be fine tools for traders who treat Wall Street like a casino, but they're of little use to in­vestors "who truly want to build wealth in the stock market. You have to get your hands dirty and understand the businesses of the stocks you own if you hope to be a successful long-term investor.

When firms do well, so do their shares, and when business suffers, the stock will as well.

Wal-Mart, for example, hit a speed bump in the mid-1990s "when its growth rate slowed down a bit—and its share price was essentially flat during the same period. On the other hand, Colgate-Palmolive posted great results during the late 1990s as it cut fat from its supply chain and launched an innovative toothpaste that stole market share—and the company's stock saw dramatic gains at the same time. The message is clear: Company fundamentals have a direct effect on share prices.

This principle applies only over a long time period—in the short term, stock prices can (and do) move around for a whole host of reasons that have nothing whatsoever to do with the underlying value of the company. We firmly advocate focusing on the long-term performance of businesses because the short-term price movement of a stock is completely unpredictable.

Think back to the Internet mania of the late 1990s. Wonderful (but boring) businesses such as insurance companies, banks, and real estate stocks traded at incredibly low valuations, even though the intrinsic "worth of these businesses hadn't really changed. At the same time, companies that had not a prayer of turning a profit were being accorded billion-dollar valuations.

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