Investors: Grab A Slice Of Corporate Pizza

Investing In Equities? What Do You Really Own? Even Professionals Get This Wrong!

Corporate Pizza

There’s a prevailing myth that buying shares in a company means acquiring a slice of a business - fractional ownership, like owning part of a corporate pizza.

Nice image, but not quite right.

In fact, it’s entirely wrong!

Some phrases are just too catchy for their own good. We hear them, we repeat them, and eventually, they stick - even when they’re not true.

Take this classic: “Bulls get angry when they see red.” Sounds plausible, right? But it’s completely false. Bulls, like many mammals, have dichromatic vision and are colour-blind to red. It’s not the colour of the matador’s cape that riles them up - it’s the erratic movement and waving that gets their attention and angers them.

And in the world of investing, the equivalent is that “Buying shares means you own a part of a business.”

No, no, no! It just isn’t so!

It’s simple: easy to understand, straightforward, or uncomplicated, yet its too simplistic and ignores important complexities or nuances.

Yet even legendary investors, who know it to be untrue, continually repeat it, which may be part of the problem. Consider these quotes:

Warren Buffett:

"Buy into a company because you want to own it, not because you want the stock to go up”

“You're not buying a stock, you're buying part ownership in a business”

“Investing, in its simplest form, is about trading your money for a tiny sliver of ownership in real businesses."

“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever."

Other great investors do the same,

Francois Rochon:

"I know that stocks represent fractional ownership in businesses and that, over time, the stock market will reflect their true intrinsic values.”

Peter Lynch:

“Although it's easy to forget sometimes, a share is not a lottery ticket... it's part-ownership of a business."

Seth Klarman:

“If you own a stock that declines, remember that you own a fractional interest in a business and that every day you are able to buy in at a greater discount to underlying value.”

Wrong, wrong, wrong!

Where Did This Myth Originate?

It is difficult to trace the root of this myth to a precise point in time, but it could have begun hundreds of years ago.

Back in 1602, the ‘Vereenigde Oostindische Compagnie’ (VOC), translated as the ‘Dutch East India Company’, became the first modern publicly traded company (a joint stock company as it was then known).

To raise money without the use of debt, the company sought to sell shares to the public. But this was a brand-new idea at the time and people had never seen anything like it.

So, the VOC charter framed shareholding as “owning a piece of the company” to make it easier to understand, and it worked. Investors bought in to the idea that they had a stake, or part-ownership, in the collective venture and liked the promise of sharing in the company's success, proportional to their investment, through the payment of dividends.

Over 400 years later, we still use that framing today, so perhaps this is the root of the confusion.

It’s Not Ownership, It’s A Relationship

A company isn’t a “thing” you own like a house or a car. It’s something stranger, more abstract.

At law, a company is a legal entity - a person just like you and me (on paper, anyway).

It has its own name, rights, and responsibilities. It can sign contracts, borrow money, sue and be sued. It’s not an object - it’s more like a character in a story, with its own role to play.

When you buy shares in a company, you’re not buying the company itself. You’re entering into a legal relationship with it - a better metaphor is a marriage contract, not a deed of ownership.

Your relationship with the company as a shareholder amounts to a set of transferable mutual rights and obligations. You can vote, you’ll receive your share of any dividends paid, and your liability is limited if things go wrong - but you can’t walk into the company headquarters and start rearranging furniture.

Think of a company like a living, breathing body:

• Management is the brain. They make the decisions, set the direction, and steer the company forward. But let’s be clear - they’re not doing it altruistically. They’re paid (often very well) to run the show.

• Investors are the heart and lungs. Whether they’re lending money (debt) or buying shares (equity), they’re the ones pumping capital, giving the business the oxygen it needs to function, keeping it alive and breathing.

So instead of thinking, “I own a slice of a corporate pizza,” a better image might be this: You’re funding the pizza oven in return for a set of contractual rights.

Management runs the kitchen. If they sell a lot of pizzas, you may get a cut of the earnings, or maybe they’ll decide to use the profits to buy more ovens. Either way, you don’t own the oven - you just have a stake in what it produces.

A different analogy?

Think of it like a trust fund. The trustees (management) decide where and how to invest the money. You (the beneficiary) don’t control those decisions, but you benefit from the outcome. If the managers do a good job, the fund grows. If not, it doesn’t.

Conclusion

When you invest in a company, what you’re really holding isn’t some slice of a business - it’s a contract. A share is just a transferable legal agreement that you can trade any time you like.

When you sell it, your rights (and any obligations) pass to the next person and the price you receive depends on how well the business utilized your capital while you were along for the ride.

Remember, it’s not ownership but a legal relationship, and like any good relationship, it helps to know who you’re dealing with.

Are you comfortable jumping into bed with the company’s management, the other shareholders, the employees, and perhaps most importantly, the customers? Once you’ve bought your contractual rights, this becomes the team and these people will have a huge influence on the outcome of your investment. This is a question too few investors bother to ask - no idea why not.

If there’s one thing to take away from all this, it’s that we really need to drop the whole “fractional ownership” mantra. Sure, it sounds neat and convincing, but it oversimplifies the reality and ends up confusing the very people who are trying to get a handle on how investing actually works.

So the next time someone says, “Buy shares to own part of a company,” maybe pause for a moment. Think back to this post and, if you’re feeling generous, gently point out that it’s not quite that simple.