I start this article with a story about my father. Dad was a partner in a well-respected engineering firm in the Washington, D.C. area. In his time, the firm did well, with work on schools in Montgomery and Prince Georges Counties, Maryland. However, the market changed. Demographics caused a slowdown in school construction and, with increased competition, his firm began to lose business.
At some point, it became obvious that the firm would not survive, and I asked my father one day why he didn't just shut down. He couldn't, he told me. There were contracts to complete, and commitments to fulfill. Sadly, he had no choice but to ride the business down to zero. It wasn't a pleasant experience, but he had a professional and ethical commitment.
Unfortunately, this is the way it is for many people who own businesses. For better or worse, their fortunes are tied to their companies. They can't just get up one day and decide that the business just "won't make it" and give up without many strong and personal consequences. Just think: Wouldn't it be nice if you could have a business and be able to back out at any time if things were going rough? It would be even better if you could do it almost simultaneously, if you could just say, "Hey this company is going nowhere, I'm selling it!" Then you would make a phone call or click a button and presto, the company is sold!
This is possible, of course, when you buy stocks in public companies. You are able to buy into a business and share in its profits. Years ago, you shared to a large degree through dividends. Today, it's more often capital appreciation in a stock price that is used as a means for investors to share in profits. And blissfully, when you own stock in a public company, you don't need to incur professional, legal, or ethical obligations to anyone with whom the company does business.
However, it doesn't always work this way. Sometimes it gets easy to feel emotionally attached to your investment -- you might even feel guilty about selling it. It can often feel when you sell a stock that you've betrayed someone!
I felt this way when I sold my Coca-Cola (NYSE: KO) stock. In my case, I'd been an active participant on the Fool's Coca-Cola discussion board, and here I was leaving that investment community with my sale of the shares. It felt as if I were abandoning old friends. However, I really wasn't. When I bought those shares, I did not have an obligation to anyone, not to the company, its customers, partners, or to the other shareholders. Selling the shares did not cause Coca-Cola to break any of its commitments, and I didn't break any of mine.
Given this, stock investing is the nearly perfect way to invest in a business. You are able to participate in many of the rewards that go with owning a business, but you are freed from much of what makes business ownership risky and stressful on a daily basis. In particular, when you see that things are bad, you can sell your holding in the company without recourse, except perhaps for financial losses. But you don't need to do the difficult task that my father did by riding the business down into liquidation because it felt morally right.
By the way, Dad didn't do so badly. He completed his contracts and went into business again under his own name. His good reputation brought him quite a bit of work. It seems that he was known as a man of his word. Years later, an engineering society even named their highest award after him. But, to keep your reputation as an investor, it isn't necessary to ride your stocks into liquidation -- leave that to the company officers. Your reputation as an investor comes, in part, from recognizing when to sell.