Martin Hawes: Savvy investors buy businesses, not shares

We still face stiff economic headwinds. Photo / NZ Herald

I returned to buying shares in April. I haven't bought many (I am still quite cautious) but that typical post-crash bounce has happened and I have made very good gains.

Some of us who have been buying over the past few months are starting to think about selling. Two groups are considering cashing up.

The first comprises those who believe it possible that the rise in share prices over the past few months has been a classic bull trap (or suckers' rally) and think that now may be the time to bank profits.

Even if the recession is over, the world in general, and New Zealand in particular, still faces some fairly stiff economic headwinds - lack of consumer confidence and spending, possible runaway inflation, rising unemployment, poor dairy prices, difficult tourism markets and so on.

The second group comprises those who feel the need to sell when their investments have shown gains - it is almost like they have to prove that the increases in value are real by cashing them up.

This is largely a short-term trader's mentality.

None of this is for me, however - I am not selling.

That's because I am a long-term investor, not a trader or speculator.

I am delighted that I have managed to buy into some very good businesses cheaply in the past few months and I am not going to let these businesses go easily.

In fact, when investing I do not ever think that I am buying something called "shares", but instead think of myself as buying businesses.

The shares in a company as traded on the sharemarket may be quite volatile but the value of the underlying business is much more stable.

The players in the market may rush around like headless chooks bidding up or pushing down the price of shares, but mostly the business remains much the same.

That is what makes recessions and market crashes so good for long-term investors - we can buy businesses cheaply because so many people focus on "shares" instead of businesses.

It may be that that the next few months see a significant dip but that sort of thing is hard to predict. Much easier to predict is how the purchases I have made will look in, say, 10 years' time.

The companies I own represent good businesses and, regardless of the ups and downs of the sharemarket, I will be able to look back and see that they were smart buying.

* Martin Hawes is a financial adviser. His disclosure document can be found at www.martinhawes.com