Buttonwood Tree on Wall Street

Kennon-Green & Co. Fiduciary Financial Advisor, Wealth Management, Global Value Investing

Buttonwood Tree on Wall Street

The Buttonwood tree on Wall Street was a place where brokers would meet regularly to buy or sell partial ownership of businesses ("shares"), negotiating with each other on behalf of clients.

One of the things that helped me build wealth early in my career is the realization that there is no “stock market”.  Instead, there are individual businesses and individual investors who own those businesses.  From time to time, a business owner may want to increase or decrease his ownership in a company so he approaches other potential investors through an intermediary known as a stock broker.  

These brokers used to meet under a Buttonwood tree on Wall Street in New York City, gathering to negotiate transactions for clients.  Then, on May 17th, 1782, twenty-four of these brokers decided to form an organization called The New York Stock & Exchange, which was later renamed the New York Stock Exchange (NYSE for short).  In 1793, they began meeting in the Tontine Coffee House, which they had built for the purpose of conducting business and socializing with all classes.  If you thought a new bakery had promise, you might go to the coffee house to negotiate with an existing owner to purchase shares in the firm, hoping for a cut of the profits.  Likewise, if you needed cash to build a house or educate your children, you might go to the coffee house to sell your ownership of a textile factory.

The 12 Implications of Realizing There Is No Stock Market

The stock market doesn't exist - it is a way to describe the actions of individual buyers and sellers of businesses.

The realization that the idea of a stock market is an artificial construct that causes investors to mistake the process of investing for investing itself led me to break down the components for my own understanding:

1. The purpose of investing is to buy profits.  Specifically, my job is to purchase the most net present value profit I can.

2. The price I pay for my share of the profits ultimately determines the rate of return I earn on my money.  If I pay $10 for $1 in net present value profits, my return is 10%.  If I pay $20 for $1 in net present value profit, my return is 5%. 

3. All money spent on transaction costs (paying the brokers, researching potential investments, etc.) is money that must come out of my share of the profits, directly cutting into my return.  Therefore, costs should be kept to a minimum.

[mainbodyad]4. An existing owner cannot sell his position unless there is a willing buyer.  When you hear people are “selling stocks”, that isn’t accurate because for every seller there has to be a buyer on the other side of the table.  Likewise, when people are “buying stocks”, that is just as false.  The nature of the structure is that all seats must be filled at the same time.  If a company has 1 million shares outstanding someone, somewhere owns those shares.

5. The so-called “market” represents what other people are deciding to do with their money.  I know from first hand experience that many well-intentioned, good people are foolish when it comes to business and money.  Therefore, I trust my own experienced judgment more than their collective actions.  My job is to find businesses in which I want to be an owner, at prices that make sense to me based upon earnings, and add them to my portfolio.  Over time, if my valuation was sound, my net worth should increase.  It doesn’t matter to me if the increase comes in the form of capital gains as other investors recognize the business is too cheap, or cash dividends, as profits are distributed to owners.

6. Common stock, which is just another way of saying “business ownership”, represent only one mechanism through which I can grow money.  It is not always the best mechanism.  As Benjamin Graham taught us: “At what price and on what terms?” are the questions that must be answered before putting money to work.

7. If you can get control of an entire business and manage the cash flow yourself, the intrinsic value of the business might be higher than it would be for you as a passive stockholder.  

8. It is entirely possible the stock market – the meeting of buyers and sellers to exchange ownership in businesses – could be shut down for an extended period of time, perhaps even years.  This happened before in the United States, when the stock exchange was shut down between July 31st, 1914 and November 28th of the same year, due to World War I.  Never rely on liquidity from business ownership to pay bills.  

9. For those with managerial or executive talent, forming new companies – creating stock – is the surest way to significant gains in net worth.  It takes only one glance at the Forbes 400 list of the richest people in the world to realize this.  The primary reason is the founders are able to buy shares at book value, capturing virtually all of the return on equity plus the capitalized value of the earnings.  

10. Over time, all else being equal and assuming reasonable valuations, the return earned by a stock is going to mirror, very closely, the return on equity generated by the underling business.

11. Using volatility as a measure of risk (Beta) is foolish.  Risk is the chance of earning sub-par, inflation-adjusted rates of return on your money as measured by the underlying net present value of future earnings relative to your investment.

12. The market is frequently very efficient, especially in developed nations.  But all individuals and institutions, acting on their own behalf, are not.  People are not always rational, well informed, or endowed with the same analytical capability.  Other facts, such as emotional health, may factor into buy and sell decisions that have nothing to do with the underling profitability of an enterprise.  This can lead to some interesting opportunities for those who pay attention and have a surplus of capital and earnings to deploy upon spotting those opportunities.

Trying to base your financial decisions upon what the stock market does is a significant cognition error.  You should go through life building, creating, acquiring, and collecting assets that throw off large sums of surplus cash relative to your investment, and use your own rational judgment to make decisions.  You cannot expect to do well if you let others think for you.