Warren Buffett has said that you should do your best to ignore the stock market's daily gyrations. Stock quotes for Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG), Bank of America (NYSE:BAC), Berkshire Hathaway (NYSE:BRKa) (NYSE:BRKb) and Dell (NASDAQ:DELL) may change every second, but the underlying value of each of these businesses changes much more slowly, if at all.
This is useful advice, and there's a way to drill it into your investing habits: Avoid thinking about stocks like a seller.
Currently, all stock prices are quoted from a seller's viewpoint. When you see a stock's price fluctuate in value in your portfolio, what you're seeing is the total value expressed in terms of an implied sale. If you sold all your shares today, the quoted amount is how much cash you would get in return.
But if you are a perpetual buyer of stocks, you want stock prices expressed in different terms. If you have $1,000 to invest, you ultimately want to know how many shares of a company that $1,000 will buy.
Of course, the simple and obvious solution is to take the amount you have to invest and divide it by the share price. Rounded down, the result tells you how many shares you can afford to buy. But the fact that you have to take that extra step brings up a broader point.
Many beginning (and some seasoned) investors sweat each drop in price of their shares. There are many reasons for this behavior, but I think one source of the problem is a seller's mindset hoisted upon investors by a culture of instant quotes. If you think like a seller, no matter how few shares you own, whether you close a position at $20.82 or $20.51 per share makes a small but quantifiable difference.
However, if you think like a buyer, such price gyrations are of little consequence to you. Since you cannot purchase fractional shares, if you have $1,000 to open a position, the difference between buying the targeted shares for $20.51 vs. $20.82 is -- that's right, none. Rounded down, $1,000 divided by each of those prices still buys you 48 shares.
So you've decided to think like a buyer; now let me tell you what the well-equipped buyer should possess. Develop an investment thesis: Understand your investment and your reasons for taking a position in the company. Understand the economic, industry, and firm-specific factors making your investment worthwhile, so you'll be better equipped to determine whether or not the market has justifiably priced your investment and, additionally, when it's time to get in or out.
In the end, how you look at a stock's price won't change its cash value, but it can help change your investing mindset. Ignoring the bipolar nature of Mr. Market (as Buffett recommends) gets a lot easier if you make a conscious effort to break out of a seller's mindset and ignore the daily barrage of instant price quotes.
Fool contributor Marko Djuranovic does not own shares in any companies mentioned in this article.
