We follow the “Value Investing” principles and methodology made famous by Warren Buffett.
When you invest like Warren Buffett you live in another world. You see a business, its operating progress, and its intrinsic value. Most investors see only a stock price; many live in a casino. They spend their time and effort watching, predicting and anticipating price changes. But what the stock does today, tomorrow, or next week is only a distraction. What makes or breaks a stock are its long term earings and dividends.
1. Buy value
There is an objective, determinable value for any investment, which is independent of the stock market. This is known as its true, real or intrinsic value, and is defined as “the discounted present value of all the cash that can be taken out of a business during its remaining life”.
This powerful formula applies to all investments be they stocks, real estate, commodities, works of art, or government bonds. The investment that provides the greatest return is the one that should be bought.
The market may ignore value for a time, but ultimately it reflects it.
“Price is what you pay, value is what you get.” Warren Buffett
“Over time, stock prices gravitate towards intrinsic value” Warren Buffett
2. Buy a business
Investment is most intelligent when it is most businesslike. When you buy a stock you are buying part ownership of a business, not a piece of paper that squiggles around on a chart. If the business does well, you will do well. Focus on the real business issues, not the daily price quotations.
“If there’s one key to what I do it’s that I look at every share of stock as being part of a business. It’s very important to have that mindset. We’re buying businesses, whether we’re buying 100 shares of something or the whole company, we’re always buying businesses. I don’t think about the price action of the stock…….We think of ourselves as buying businesses and not stocks. This thinking has been the cornerstone of my investment behaviour.” Warren Buffett
3. Welcome volatility
The true investor welcomes volatility. A widely fluctuating market means irrationally low prices will periodically be attached to solid businesses. This can apply to individual stocks or to the whole market.
“Look at market fluctuations as your friend rather than your enemy – profit from folly rather than participate in it. If you have that attitude you stand out ahead of 99 percent of all the people who are operating in the market – it is an enormous advantage.” Warren Buffett
4. Ignore the market
Except to the extent it offers an opportunity to buy stocks at an attractive price, the market should be ignored. The long term value of stocks is determined by the operating progress of the business, not daily price quotations. Fluctuations in the stock market do not make you richer or poorer. Only changes in the intrinsic value of a business can actually do that.
“As far as I am concerned the stockmarket doesn’t exist. The market is only there as a reference point to see if anybody is offering to do anything foolish. ……Short-term price movements are irrelevant……..I have no idea what the stock market is going to do tomorrow or next week or next month or next year. I never do and I never will. It is not something I think about at all…….In fact we would not care in the least if several years went by in which there was no trading, or quotation of prices.” Warren Buffett
5. Ignore the economy
Don’t be distracted by economic predictions and miss the real game, which is valuing businesses and identifying underpriced stocks. Indeed, the best buys can be made when apprehension about some economic event is at a peak.
“We ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. I read the Financial Times every day, but if there is something in the headline, ‘What I think the world will look like next year’ by anybody prominent in world economics, I don’t read the article. The time spent doing that I could spend looking at businesses. I’m not interested in soothsaying. Nobody knows what the economy’s going to look like a year from now or two years from now……. We have never foregone an attractive purchase because of the macro or political environment. In fact, these subjects never come up when we make decisions.” Warren Buffett
6. Stay rational and detached
The investor is likely to be their own worst enemy! It can take considerable willpower to ignore the market’s herd mentality and behave rationally; to keep your head when others are losing theirs. But if you truly want to be a successful investor, you must embrace this simple truth: the market is there to serve you, not instruct you. It just sets prices. If the price is silly, you take advantage of it.
“You have to be able to control yourself; you can’t let your emotions get in the way of your mind…..The markets have not gotten more rational over the years. They’ve become more followed. But when people panic, when fear takes over, or when greed takes over, people react just as irrationally as they have in the past…….When investing, pessimism is your friend, euphoria is your enemy.” Warren Buffett
7. Invest for the long term
A funny thing happens when you invest long term (ten or more years). You begin to think long term. You focus on the essential items. The ever present market hype, which ultimately has no bearing on your investment outcome, becomes irrelevant.
“Successful investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time … … I close my eyes and think about what a company’s going to look like in ten years before I invest.” Warren Buffett