Small Business Valuations Plunge 5% Last Week!
How does your small business handle stock market volatility? Do you overreact when the market decides it’s worth a lot more or a lot less?
Let’s compare small businesses to the stock market businesses to get a different perspective on market fluctuations.
Just because there is no small business stock market and no small business market value analysts on TV, it doesn’t mean your business doesn’t technically have a value each day – it does – it just isn’t calculated and reported on in the media every minute.
The larger businesses that trade on the stock market create their value in much the same way as your business does and the valuation methods have a lot of similarities.
Let’s review the recent valuation fluctuations in the stock market through the lens of the small business owner and use the popular fictional character Mr. Market. Mr. Market was created by Benjamin Graham for his 1949 book, The Intelligent Investor. By the way, Benjamin Graham taught Warren Buffet about investing.
Let’s assume there is a business very similar to your business next door to yours. It is owned by a guy named Mr. Market. In order to simulate the stock market, let’s also assume that you can buy or sell shares of each other’s small businesses.
One morning Mr. Market hears on the news that the Chinese economy and stock market are in a downward spiral. He panics. He comes rushing over to you and offers to sell you shares of his small business at a discount. How do you decide to invest or not? Do you listen to the shiny shoed analysts on the TV? Or do you look at his business and determine the value based on what you know about it. When you look at the business itself, it is a buying opportunity created by a panicked, overreacting owner.
Next month, Mr. Market hears that the Federal Reserve has decided not to raise interest rates for the next six months for sure. He is ecstatic and knows the future looks so much brighter today. Now, he comes over and asks to buy shares in your business. He will even offer you a premium today because he is fired up about future opportunities. Isn’t this a better opportunity for you to sell some of your shares to him?
From this perspective, you can see how Warren Buffett and Benjamin Graham made good investments. They look past the short-term market fluctuations and look at the underlying business you are investing in. Panic in the stock market doesn’t actually change the fundamental value of any business, it just creates potential buying opportunities. I have heard another successful investor state this philosophy in a simpler way:
When everyone else is walking, you run.
When everyone else is running, you walk.
I like this concept, everyone is at least getting some exercise. 🙂