When it comes to Investment, Warren Buffett stands tall than any of his compatriots. I was reading the book by Robert G. Hagstrom called "The Warren Buffett Way" and I would like to keep a note of important things I have read in this book:
Page-41 & 42
The margin of safety concept was applied by Warren Buffett during the initial years of his Investment career. Margin of safety allowed Investors to invest in stock market without risk. You need to time your entry into the stock market. What is the right time? If people knew the answer to this question then every investor and trader in this world would be Warren Buffett. But Benjamin Graham very carefully explained a logical and fool proof way of timing the your entry into stock market. To time your entry you need to know the "Intrinsic Value of Company". It the the price of the stock is undervalued as compared to its intrinsic value, then it becomes a very good buy. The intrinsic value of a company is decided by four important business parameters.
- Companies assets
- Future earning power
The companies evaluated on the above parameters and the if the conclusion is as discussed below then do whatever you can to buy that stock. I quote what Robert G. Hagstrom has to say about undervalued stocks:
"The first approach was buying a company for less than two-thirds of its net asset value, and the second was focusing on stocks with low price-to-earnings (P/E) ratios"
It must be noted that the stock market is driven by speculation. In an Ideal conditions all stocks should trade at their book value (Net Asset Value). But you will find stocks trading at 2 to 10 times of its book value. This is called speculation and tracers drives these speculative prices. You need to sit back and watch all good stocks with an eye of a hawk. If speculation drives the price up they also make it fall. Grab the stocks when the prices fall below its book value. If you want to maintain the "Margin of Safety" buy stocks at 2/3rd of its book value.
Make a list of all top performing companies listed in stock exchange. Make a note of their P/E ratios. Keep a track of all companies with very low P/E ratios. As soon the price of stock of these falls below the book value, grab it and hold it forever.
The author is a big enthusiast of the process of investment and inspires to set up a highly successful online business of himself. He is a firm believer in the concept of 'working for self can make this world a better place to live'.
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