The Investing Method -Warren Buffett Style
If you want to emulate a classic value style, Warren Buffett is a great role model. Early in his career, Buffett said, “I’m 85% Benjamin Graham.” Graham is the godfather of value investing, and introduced the idea of -the underlying fair value of a stock based on its future earnings power. He netted over $42 billion personally with an investment partnership he started with only $100. But there are a few things important to know worth noting about Buffett’s interpretation of value investing that may surprise you.
1. Don’t be the patsy (easily cheated or blamed)
If you cannot invest intelligently, the best way to own common stocks is through an index fund that can be easily spotted. Those will beat the net results enjoyed by the great majority of investment professionals. As they say in poker, ‘ If you’ve been in the game 30 minutes and you don’t know who the patsy is, you are the patsy’.
2. Operate as a business analyst
Do not pay attention to market action, macro-economic action or even securities action. Concentrate on evaluating businesses.
3. Look for a big moat (a deep, wide trench)
Look for businesses with favourable long term prospects, whose earnings are virtually certain to be materially higher for 5, 10, 20 years from now.
4. Exploit Mr. Market
Market prices move around business value, much as a moody when things are neither that good nor that bad. The market gives you a price, which is what you pay, while the business gives you value and that is what you own. Take advantage of these market mis-pricings. But don’t let them take advantage of you.
5. Insist on a margin of safety
The difference between the price you pay and the value you get is the margin of safety. The thicker, the better. Berkshire’s purchases of the Washington Post Company in 1973-74 offered a very thick margin of safety. (price about 1/5 of value)
6. Buy at a reasonable price
Bargain hunting can lead to purchases that don’t give long-lasting value-buying at frenzied prices will lead to purchases that give very little value at all. It is better to buy a great business at fair price that a fair business at great price.
7. Know your limits
Avoid investment targets that are outside your circle of competence. You don’t have to be an expert on every company or even many -only those within your circle of competence. The size of the circle is not very important, knowing its boundaries, however, is vital.
8. Invest with ‘son-in laws’
Invest only with people you like, trust and admire -people you’d be happy to have your daughter marry.
9. Only a few will meet these standards
When you see one, buy a meaningful amount of its stock. Don’t worry so much about whether you end up diversified or not. If you get the one big thing, that is better than a dozen mediocre things.
10. Avoid gin rummy behaviour
This is the opposite of possibly the most foolish of all stock exchanges maxims: ‘You can’t go broke taking a profit’. Imagine as a stockholder that you own the business and hold it the way you would if you owned and ran the whole thing. If you aren,t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.
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