Here's an old-school SAT analogy question for you. You are to your stocks as ...
a) believer : divine presence
b) owner : property
c) investor : investment
d) gambler : poker hand
Let's have a closer look at those four possible answers, shall we? Come on, it will be fun (and educational).
There are likely some people who buy stocks in the honest but mistaken belief that every company has the best interests of investors in mind, and that they are beyond reproach. Every business decision moves the company closer to big profits, and then toward some combination of growth and wealth distribution that will benefit the true believers. I think we've seen enough evidence recently to say that this approach is naive. Let's move on.
Now we're getting somewhere. Technically speaking, a shareholder does own a small part of the underlying business that the stock represents. But unless you're Carl Icahn or Warren Buffett, that usually doesn't mean that you have a say in how to run the business. For instance, owning a share or two (or a couple of million) of Research In Motion (Nasdaq: RIMM ) won't let you design and market the BlackBerry of your dreams, nor do you get to decide which hot new model goes to AT&T (NYSE: T ) and which one to Verizon (NYSE: VZ ) . That brings us to ...
... The shareholder whose head is firmly attached to a pair of shoulders. Managers are no saints, and you don't get to tell them exactly what to do. But given a lengthy investment period and allowing for the occasional horrible misstep, stocks do tend to outperform savings accounts, bonds, and pretty much any other investment class you'd care to mention. The humble individual investor in Google (Nasdaq: GOOG ) is endorsing the search giant's ad-based business model and trusts management to keep coming up with innovative and profitable new ideas for years to come.
You gotta know when to hold 'em and know when to fold 'em. Lost a few big bets? Up the ante with higher leverage -- rely on margin (a.k.a., investing borrowed money), reckless use of options, and other trickery to get back in black. The next few rolls, hands, or races will surely go your way! Roll the dice and pray hard.
Um, not. Gambling with your nest egg -- or with money you don't even have -- is darn likely to get you in serious financial trouble. I'll be blunt: Don't do it.
So the correct answer is C: You are to your stocks as an investor is to investments. It sounds so simple, but many of us are getting it all wrong anyway.
What would the ideal shareholder look like? In our Motley Fool Stock Advisor service, we strive for the following seven core principles:
- Buy Business, Not Tickers
- Be a Lifetime Investor
- Fish Where Others Aren't
- Check Emotions at the Door
- Keep Score
- Be Foolish and Have Fun
We figure that if we can help our subscribers live out those seven principles in our daily investing, we'll have the right temperament in this market. Indeed, attempting to keep a level head has allowed the team to objectively scrutinize its losers (Whole Foods Market (Nasdaq: WFMI ) among them) and winners (including Marvel (NYSE: MVL ) and Quality Systems (Nasdaq: QSII ) ).
There you have it: The only way you should be buying stocks is as an investor. While there may be four kinds of shareholders, that's the only one that makes sense.
Remember that the next time your day-trading poker sense ever starts tingling. And if you'd like to see the Stock Advisor team's five best stocks for new money -- or join a community of like-minded Fools -- you can try out the service free for 30 days, with no strings attached.
Fool contributor Anders Bylund owns shares in Google and Marvel, but he holds no other position in any of the companies discussed here. He thinks the SAT made a huge mistake in dropping the analogy section. You can check out Anders' holdingsor a concise bio if you like. Google is a Motley Fool Rule Breakers pick. Whole Foods, Quality Systems, and Marvel are Motley Fool Stock Advisor picks. The Motley Fool is investors writing for investors.