"Can you really explain to a fish what it's like to walk on land?" Warren Buffett once asked. "One day on land is worth a thousand years of talking about it, and one day running a business has exactly the same kind of value."
After graduating from university a couple of years ago, I decided to heed the advice of the Oracle of Omaha and bought myself a 12-unit, 20-tenant apartment building, in a charming neighborhood in southern Ontario. I used capital from investors along with my own money as equity, while the rest of the purchase was financed through a mortgage. The reason I undertook this adventure -- besides being temporarily ignorant of the concept of risk -- was to understand, firsthand, the key factors that drove businesses by running one on my own. Of course, I wanted to make some money, too -- otherwise, I'd really be crazy.
Seek and ye shall learn
The most revealing part of the whole experience was that I learned a handful of lessons not only from running the apartment building, but also in my very search for the apartment building.
By going through such a wide range of properties, all with a different set of characteristics -- including variances in location, income level, cost structure, and purchase price -- I naturally began to piece things together. I soon realized that a great investment would combine the best qualities from all of the buildings I had looked at, such as:
- A heavily trafficked location close to major amenities.
- Tenants with stable jobs, to ensure recurring revenues.
- A building that was safe, solid, and clean so tenants wouldn't mind paying a premium to live there.
- An attractive purchase price that would limit my downside as well as increase my potential for an above-average return.
Eventually, I found this type of no-brainer deal after three months of diligent searching and a certain amount of good luck, when I met a landlord who was retiring and therefore willing to let go of the property at a discount. The investment was a success because the business was already good and the purchase price was, well, great. As Peter Lynch once said, "Go for a business that any idiot can run, because sooner or later, any idiot probably is going to run it." I'd love to tell you it was my superior managerial prowess that eventually earned me excellent returns on the apartment complex, but that had very little to do with it.
And there's really nothing different between this experience and generating exceptional returns in stocks.
The very ease of buying and selling stocks in the secondary market is what gets most individual investors into trouble to begin with. Because it's so simple to open a brokerage account and own hundreds of stocks, in different sectors, all around the world -- not to mention the allure of getting into derivatives -- investors generally feel inclined to shuffle things around to react to, and even anticipate, every single market price wiggle.
However, investors would do well -- even really well -- to approach the buying of stocks with the same frame of mind as they would the purchase of any rental property, doughnut franchise, dry-cleaning business, or any other whole business being sold out on the street.
Think like an owner
In other words, when you're buying a stock, try to imagine that you had to purchase and operate the entire business yourself. Now, you'd probably want a business that was fairly straightforward and had some unique advantages over the neighborhood competition. You'd also want to purchase the business at a reasonable price -- or, even better yet, at a bargain-basement price. The last thing on your mind would be getting rich overnight, revolutionizing the world with your products, or spending time on opportunities that you find extremely difficult to understand. You'd be thinking about ways to limit your downside as much as possible, because you know many things can, and will, go wrong when you run a business. Hey, things happen. But if you leave lots of room for error -- that is, if you give yourself a margin of safety -- your investment will probably end up doing pretty well.
Keep it simple, Fool
Let's use as an example the easy-to-understand stalwart Diebold (NYSE: DBD ) . This manufacturer, installer, and seller of ATMs owns nearly 70% of the North American market. Given the minimal capital expenditures and recurring revenues associated with this type of business, it's no surprise that the company is a dependable generator of free cash flow. When the Motley Fool Inside Value team first recommended Diebold, its stock was selling at an attractive discount to the company's intrinsic value.
In fact, when you investigate several of the recommendations over at Inside Value, such as AutoZone (NYSE: AZO ) and Rent-A-Center (Nasdaq: RCII ) , it won't be too difficult to notice a particular theme developing: They are all simple -- OK, mildly boring -- businesses that generate the kind of cash that's used either to pay dividends or to reinvest at attractive rates of return. They are also blessed with competitive advantages that allow them to protect their cash flow. At one time or another, they were all available to own at a discounted price.
There's bang in those boring bargains
Each one of those not-so-revolutionary picks has soundly been thumping the S&P average. This proves, once again, that even auto-parts retailers and rental-service companies have the muscle power to outperform the most exhilarating biotech, aerospace, and fuel-cell stocks.
And when these dull stalwarts go on sale, you might want to think about backing up the truck. These are the opportunities that simply offer the very best chance to build substantial wealth while you keep risk at a minimum -- right where risk should be.
Thinking about stocks as the ownership of real, tangible, and concrete businesses -- no different from an apartment building in beautiful southern Ontario -- is the first and most crucial factor to investment success. Yet it is the most often overlooked. By regarding yourself as the potential owner of any publicly traded company of your choice, you'll soon be making more intelligent, shrewd, and profitable investment decisions. Over the long run, your portfolio -- and not your stockbroker -- will thank you immensely for it.
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All of the companies mentioned here areInside Valuerecommendations. If you'd like access to more market-beating bargains, try a risk-free, one-month pass on us. Many of the businesses may be boring, but the returns are far from it.