Investing In The Stock Market Is Not Some Parlor Game

Written by the William Allan team · Published 2025-07-19

Recently I participated on a panel where we fielded investment/finance related questions from members of a small business owners’ networking group. There were three professionals: a real estate investor / realtor, a sole practitioner in the entertainment industry, and me. I left this experience with one overarching thought: The audience was highly skeptical of the stock market and the statistics I was sharing regarding historical growth of the stock market.

We discussed the importance of maximizing the growth of your money by contributing to tax-deferred investment accounts (i.e., Solo 401(k) plans, SEP IRA’s) and within these account(s) invest in equity-based investments (i.e., individual stocks, mutual funds, ETFs). Sole proprietors have the opportunity to contribute a lot of their income into these tax deferred accounts and quite frankly if you have the wherewithal to make these large contributions and keep them invested for the long-term those contributions may support your retirement plan, subject to contribution limits, investment results, costs, and future spending. But even after sharing this information, questions remained about how investors assess the potential for growth.

Of course, no one can predict the future. We can only use history to guide us when projecting investment returns. But as I reflected on the skeptics, I realized the majority of these folks didn’t know what stocks actually represent. They were clear that when buying real estate, you are buying dirt. It’s not going anywhere. But when buying stocks, what am I actually getting? Am I just hoping they go up in value somehow? Obviously, there is much more to stock investing and I thought I’d give a high-level overview here.

Simply, stocks represent ownership in a company. When you want to buy a stock, you go out into the stock market and buy shares from someone who wishes to sell their shares. The seller receives the proceeds of that trade. A company can receive money when it issues new shares, including an IPO, follow-on offering, or private placement. So, now you are a shareholder of Company ABC. Company management now works for you. Their job is to run this business successfully.

Business earnings and cash flows matter to valuation, but a successful company does not automatically produce a rising share price. Expectations, interest rates, sentiment, and external events also affect prices. If an investor pays a price that assumes more growth than the business delivers, improving profits may still accompany a disappointing return.

For us, we look to invest in companies with promising business prospects, sound financials, cash generation, and management focused on allocating capital productively. These characteristics inform our research. Our valuation estimates can be wrong, and a selected investment can lose money; holding through a decline should depend on the evidence and the client’s circumstances.

I guess the best way to explain a stock is that it’s not the actual piece of paper (I.e., the stock certificate) that is worth something… It is what that certificate represents. The assets, the ability to create positive cash flow, the ability to sell more products/services, etc. is what you are investing in. And it is this that may very well be worth more than a piece of dirt. Understanding the ownership interest gives you a clearer basis for research. It does not remove uncertainty about the business or the price its shares will command.

Further reading: SEC stock-ownership and investment-risk overview and primary-market definition.

This commentary is for informational purposes only and is not investment, tax, or legal advice. All investing involves risk, including the possible loss of principal, and past performance does not guarantee future results.