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 global laundries is Markel Corp. We wrote about the value of the imitator our Q2 commentary of 2014. We started investing in this business a year ago at share prices below $600. This implied a 20% premium to the accounting valuation of the business, but still significantly below our estimate of intrinsic value. Since then the share prices has appreciated 30% and the business is currently the largest exposure in the global funds.

The question could be askes, why are we not selling this business? 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. Markel operates in some niche areas of the insurance market and management has proved over the years that they choose profits over market share any day of the week.
o Nobody is offering us a silly amount of money for our shares - yet. The share price performance over the past year can be explained by nearly equal amounts of business growth and valuation increases. However, the current valuation remains significantly below what we regard as a fair price for the business.

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