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"Owner's mindset" was one of the key mindsets that the father of value investing,Benjamin Graham, proposed. When you purchase a stock, you purchase an "ownership interest" in the underlying business. That may seem self-evident, but many people buy stocks thinking only of the ticker price and the paper to be traded in the marketplace.They don't think about the underlying business.
Thinking like an owner would simplify matters and provide the much-needed mental discipline to apply business principles to your investing.
One of Graham's most famous ideas, "Margin of Safety", is the gap between the price paid and the inherent value. Investments can go wrong at times, leading to losses. The concept of the "Margin of Safety" mitigates the chances of incurring catastrophic losses. Investing, inherently, is a form of betting on an uncertain and unpredictable future. However smart an investor or analyst may be, he or she is bound to make mistakes. Miscalculations are a common feature of the research exercise. The higher the margin of safety, the lower the chances for losses.
Another famous contribution of Benjamin Graham to the literature of value investing is the idea of "Mr. Market" - an emotional and irrational partner who offers to either buy you out or sell you his share every day.
"Mr. Market -- he's kind of a drunken psycho. Some days he gets very enthused, some days he gets very depressed. And when he gets really enthused, you sell to him, and if he gets depressed, you buy from him. "There's no moral taint attached to that" - Warren Buffet
"Mr. Market's job is to provide you with prices; your job is to decide whether it is to your advantage to act on them. You do not have to trade with him just because he constantly begs you to" - Benjamin Graham
The price that one encounters on the stock market is not the same as the "Value" of the underlying business. Knowing this distinction is critical for sound investing. Value is a rational judgement about the real business that you, as the stock owner, get to own on the purchase. All the future earnings make up the "Value". A value investor always compares the "value" of various businesses versus the "price" traded in the marketplace - assessing the discount or premium of each.
