Many of our clients are under the impression that when we invest in equities we are investing in the stock market on their behalf. We are investing on their behalf - but not in the stock market. We are investing in companies and happen to go to the stock market to buy parts of these companies. You could say the difference is a matter of semantics. It is far more than semantics; in fact the difference is rather vast. A mismatch between what our clients think we do and what we are really doing can cost both ourselves and clients dearly. In this commentary we will address this potential misunderstanding.

"Investing in the stock market" implies that your main focal point is the stock market and you will be looking for opportunities to sell stocks at higher prices than you bought them.

When we buy parts of companies our main focal point is companies and we only go to the stock market to see if anybody is prepared to sell us shares in such a company at a price which we find agreeable. The logical question is, when do we go back to the market to sell these shares? Ideally never.

Let's work through a hypothetical scenario to illustrate our decision making process. You noticed that business is booming at your local laundry and you asked the owner if you could buy a 10% stake. The owner agrees and offers you 10% of his business at a price which your calculations deem more than fair. After you have written that cheque your behaviour changes slightly - for example the shortest way to anywhere is to drive past the laundry to assess the length of the queue. You are also suddenly much more genuine in your concern about the owner's health. Note that these concerns have got nothing to do with the stock market, even if the laundry had been listed.

So when will you consider selling your shares in this booming little enterprise? Probably only in the event of one or more of the following:
o The manager is selling his 90% share and handing the operations over to somebody else.
o The "watch this space" boards go up for a new laundry on the opposite side of the road.
o Somebody comes along and offers you a silly sum of money for your shares.

In all other cases, you'll remain a happy investor.

This, in a nutshell, is what we do.

One of our favourite little laundries is Capitec Bank. The Capitec share prices is up 2 and a half times since August last year and we are understandably getting many questions as to why we are not selling all our shares. Well, if we work our way through our laundry logic illustrated above:
o Management team is intact and superbly aligned with our interests as they are also large shareholders.
o We're not overly concerned about competitors. Capitec continues to make rapid inroads into the South African banking market with their market share having grown by over 60% over the last 3 years.
o Nobody is offering us a silly amount of money for our shares - yet. (There are however a couple of investors who are now working out how silly they were to sell their shares in August last year.)

We invest our clients' capital in great companies; it's much easier than trying to make money on the stock market.