A few PRINCIPLES to take into account

  • When you invest, look for simplicity. Do what is easy and obvious. Don’t look to elaborate complicated answers to complex questions.
  • Look for solid companies whose ” business model” is easy to plan.
  • Don’t keep your eyes on the company stocks. Insteak keep them on its development, projects, etc.
  • Buy businesses, not stocks.
  • Look for solid companies like castles. Companies which are different from the competition.
  • Forget ” high tech”, buy ” low tech”.
  • Look for high quality companies, which are being sold cheap for reasons other than its fundamentals or its management quality.
  • Always be fearfullwhen others are gready, and gready when others are fearfull.

Those are principles that Warren Buffett is following in his investments decisions.

The METHOD to make good investments decisions

Once you accept the concept of intrinsic value as a method of determining what a company is worth, apply it to the field.

You have to buy stocks selling for less than intrinsic value. If a company is worth X, you want to invest in it at less than X.

Like a banker, you look for the margin of safety, the ” collateral”. If you are wrong, or if some unforseen event reduces your estimates of a company’s value, you want a cushion.

If you buy shares in a company for less than they are worth to a knowledgeable buyer of the entire company, you have a margin of safety. As Warren Buffett advised, the first rule of investing is don’t lose money and second rule is don’t forget rule number one.

Most companies increase their net worth, or intrinsic value, over time. If intrinsic value is your benchmar’, you can mrofit in two ways. The first is the value of the shares you own will increase whild you own them. Second, if the price of the stock rises from less than intrinsic value to intrinsic value over time, you will have a win/win situation.

Because if you pay full price for a stock, your gains are limited to the company’s growth and dividends it may pay you.

If you buy a stock for $10,00 and we believe it is worth $15,00, we have a potential gain of $5,00. If during the period we own the stock, the company can grow its business 10 percent so that the stock becomes worth $16,50, we have larger potential gain. However, the greatest part of that gain has come from buying the stock cheaply in the first place.

If you had bought the same stock for $15,00 your potential gain might only be $1,50.

THE BEAUTY OF VALUE INVESTING

The beauty of value investing is its logical simplicity. It is based on two principles : what’s it worth (intrinsic value), and don’t lose money (margin of safety).

Benjamin Graham was the first to introduce these concepts, which are as relevant today as they were then.

Think about bankers when they make a loan, they first look at the collateral the borrower has to pledge to secure the loan. Next, they look at the borrower’s income for paying theinterest on the loan. If a borrower earns $75,000 a year and wants to take out a $125,000 mortgage on a $250,000 house, that is a pretty safe bet. However if someone earning $40,000 a year wants to borrow $400 000 to buy a $425 000 house, it is notso safe.

Stocks are not unlike houses. When you apply for a mortgage, the bank sends an appraised to value the house you want to buy. In the same way, an analyst acts like an appraiser trying to estimate the value of a business.

That’s where the concept of intrinsic value originates from.

It is the price that would be paid if a company were sold by a knowledgeable owner to a knowledgeable buyer in an arm’s-length negociated transaction.

There is so few investors who pay close attention to intrinsic value, but it is important for two reasons : it enables investors to determine if a particular stock is a bargain relative to what buyer of the entire company would pay, and it lets investors know if a stock is overvalued.

The overvalued part of the equation is even more important if you don’t want to lose money.

THE 2 Questions Warren Buffett asks himself before buying a company

There is 2 questions that Warren asks himself when he’s looking at companies to invest.

They are absolutely crucial and fundamental to your invesment strategy, the answer to both of these questions should determine if you’re buying or not the company shares.

 

– HOW MUCH DO WE THINK IT’S WORTH ?

– HOW MUCH IS IT SELLING FOR ?

 

When Warren bought Petrochina at 20 billion. He thought the company was probably worth 100 billion.

But here’s the key : he didn’t look at the price first, he looked at the business to figure out how much is it worth.

Because if you look at the price first you’ll get influenced by that.

So you look at the company first, you try to valuate and then you look at the price. And if the price is way less than what you just valuated.

Then, you’re gonna buy it