Image source: Getty Images
There are some statements that serious investors never seem to make about the stock market:
- It’s time to take some money off the table.
- If I take my initial stake back, then I’m just playing with house money.
- Receiving dividends is like earning interest on your savings.
Understanding why investors don’t say these things gets to the core of what investing is – and why I think it’s great.
Gambling
The first two are gambling statements. People who say things like this see the stock market as a casino (either metaphorically or literally) and think of their positions as bets.
I don’t object to people gambling in the stock market or anywhere else. But they should be clear that’s what they’re doing – and that’s not the same as investing.
Investing isn’t about cashing out bets when stocks go up. As Warren Buffett says, it’s about owning (part of) a company and earning a return from the profits it makes.
It also isn’t the case that money you didn’t invest is “house money”. It’s your money and you can still earn a return on it or lose it by doing something unwise.
Dividends
When a bank pays you interest on your savings, where does that come from? Answer: the bank – the cash goes from their balance sheet to your account and you get (slightly) richer as a result.
This however, isn’t what happens with dividends. When you get a dividend from a company you own shares in, the money goes from your business to your brokerage account.
For those who – like Buffett – see themselves as business owners, the difference is huge. Dividends don’t build their wealth, they just move money (that was already theirs) around.
What builds wealth for investors is the company generating profits. This is why Buffett’s company — Berkshire Hathaway — doesn’t pay dividends and why I prefer owning shares to cash savings.
An example
Rentokil‘s (LSE:RTO) one of the companies I own shares in, is a great example of why I love investing, and could be worth considering. Pest control isn’t the most exciting business, but I think it’s a great industry to be in.
As far as I can tell, the market’s likely to be extremely resilient in recessions, inflation and any other macroeconomic environments. If anything, global warming’s probably causing it to grow.
This isn’t to say there are no risks with Rentokil. The company’s been having some operational issues after a big acquisition and these have been weighing on profits.
That’s something that matters to me – as an investor – very much. But taking a long-term view, I think there’s a lot to like about Rentokil and its competitive position in a growing market.
Why I think investing’s great
Setting up my own pest control operation would be hugely impractical. Rentokil’s scale means I’d never be able to compete with the service and value it provides customers.
Fortunately for me, I don’t need to. The stock market allows me to buy shares in the company (which I plan to keep doing) and benefit from the advantages it has.
Importantly though, I’m looking to the firm’s profits for my returns, because that’s what it is to be an investor. It isn’t what happens to the share price or whether it keeps or distributes its earnings.
