What does it mean to be a Business?
Course Section 1 - Lesson 1
Business = Profits
What does it mean to be a "business"? Saying that my store is "open for business" conjures images of a cafe down the street opening its doors for the day. But that word: BUSINESS conveys a very special meaning.
This is a course about business. It is specifically designed for people interested in buying and selling businesses on the stock market. And we are going to be talking a lot about stocks as we move forward through the material. But you must never forget that what we are talking about is business.
So what does the word business convey? Well, it makes it clear that this organization exists to make money. A business will never offer free products or services with no expectation of a profitable transaction in the future - as a charitable organization might. A business will also refuse to provide a service at cost or below cost like a governmental organization might.
Without profit or at least an intent to profit, there is no business.
Profits Move Business & the World Forward
Sometimes the idea of profit gets a bad rap. There seems to be a feeling of being taken advantage of when you know someone has profited off you. While I understand where this idea comes from, I couldn't disagree with it more. Businesses competing for profits is the engine that slowly but steadily increases everyone's standard of living over time.
Seeking profits is a good thing, and it is something that you as an investor should be searching for in the companies you invest in.
Let's try to put our finger on exactly why striving for profits is such a good thing.
The Power of Profit Seeking
In the year 1909, there were more than 24 million horses in the United States. That was about 1 horse for every 4 people. Around the same time, Henry Ford began mass-producing automobiles to make money. Initially, one of Ford's cars cost $825. That doesn't seem like much money for a car today. Still, at the time, that was nearly 3 times the annual salary of an average American. Additionally, it was significantly more expensive than the cost of a horse, the dominant form of personal transportation at the time, which was about $150. Because of this, cars were only affordable to the rich.
However, Henry Ford wanted to sell as many cars as he could to maximize his profits. To sell more cars, he needed to get the price down. Over about 15 years, Ford managed to create a much more efficient process for creating each vehicle, which allowed him to drop the cost of his automobile from $825 to $260. The price decline meant that cars were now affordable to most of the population, and Ford saw sales boom. In 1909, Ford sold just over 10,000 vehicles. In 1924, he sold nearly 2 million. Even though Ford sold their cars for less, Ford's total amount of profit was much greater in 1924 relative to 15 years earlier.
And we saw that increased profitability reflected in the value of Ford's stock. In 1909 the company was valued at ~8 million dollars. By 1924 the company was worth over $1 billion. A $1,000 investment in Ford in 1909 would be worth $125,000 by 1924.
That is the power of profit-seeking behavior. Ford didn't cheat anyone out of the profits that he earned; in fact, he made the lives of 10's of millions of people better due to his automobile. The profits that his company earned and the increase in the value of the company's stock came from Ford creating an excellent product for customers who were willing to pay for that product.
Find the Profit
As we move forward through this course, I want you to remember that when we are looking for companies to invest in. The thing that will make you successful is identifying companies that create profits. Profits don't have to be immediate. Some of the best investments involve companies that are not currently profitable but will be in the future. But profits must come at some point. Otherwise, there will be no cash left to distribute to you, the owner of the business.