As a chicken farmer, I'm interested in eggs. The eggs are what I can eat and what I can sell. As long as I'm getting a steady stream of eggs from my chickens, I'm happy. And if I have excess eggs, I can use some to make new chickens and thus provide even more eggs in the future.
When I buy some shares in a company, I like to think of them as chickens in my growing flock. Instead of eggs, they provide me with dividends.
As a chicken farmer, I'm not too much bothered by the day to day fluctuations in the price of the birds. As long as the birds I have are giving me eggs, the price fluctuations are irrelevant. Of course, if chickens became particularly cheap, I can always buy some more and that's goodness, not something to worry about.
Long term investing is similar - the daily price fluctuations of shares is not a worry. As long as dividends continue to flow, then I can sleep peacefully at night.
Of course, in the same way that I'd want to make sure I had healthy chickens, I want to ensure that the companies I invest in are healthy too. I'm not looking for small start ups that might be the next big thing and triple my investment, but rather steady investments with a solid record and good prospects for being around over the coming decades. Profitable businesses that pay shareholders a good dividend. And in the same way that I could hold back some eggs to grow more chickens, I can ensure that I hold back some of the dividends I receive to buy more shares.
But what about an unexpected disaster? Chicken fever? A fox? There will always be things you can't foresee. For example, the Deepwater Horizon oil spill that hit BP in 2010, which so far has cost BP over $65 billion. So it's critical to diversify - maybe buy different breeds of chickens or even some ducks and geese. I try and cover a wide range of different industrial sectors as well as investing in a broad range of geographical economic areas. If the UK gets "Boris'ed", then that's OK, because the overseas investments should keep me going.
To ensure I keep going forever, then what happens if one year the chickens don't do so well and lay fewer eggs? Well I don't panic and sell some chickens to make up the shortfall. Instead, I tighten my belt and have two eggs in my omelette instead of three. I maintain the flock so that things can hopefully get better in the future. And every time I can spare an egg or two, I'll pop them in the incubator to make my flock a little larger.
Just remember, it's all about the eggs...
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