It may be helpful to think of the investing process as if you were planning a trip across the ocean. You cannot do anything about the weather or the tides (the current economic conditions). You can try to wait out bad weather that might sink your ship, but then you would be sacrificing time, a precious resource in investing.

The main thing you can control is which ship to board. Think of the seaworthiness of a ship as the competitive positioning of a business, and the horsepower of the engine as its cash flow. Some ships have thick, reinforced metal hulls, while others have rotting wood. Clearly, you would pick the ships that are the most seaworthy (with the best competitive positioning) and have the most horsepower (cash flow).

Though the ship's captain (company management) certainly matters, the quality of the ship is more important. On a solid vessel, as long as the captain does not mess up, there is not much difference between a good and a great captain. Meanwhile, there is nothing the best skipper can do if the boat's engine is broken and the boat is constantly taking on water.

To relate this to stocks, business economics trumps management skill.

It's also worth noting that all ships will experience waves (volatility). And though it is true that a rising tide lifts all ships, the tides have nothing to do with the quality of the boats on the sea.

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The bottom line

It is very easy for new stock investors to get started on the wrong track by focusing only on the mechanics of trading or the direction of the overall market. To get yourself in the proper mind-set, tune out the noise and focus on studying individual businesses and their ability to create profits. In the coming lessons, we will begin to build the skills you will need to become a successful buyer of businesses.