CONITNUED FROM YESTARDAY......
TWO QUALITIES OF INVESTMENT
1) some degree of safety of principal
2) and a satisfactory rate of return INCLUDING price appreciation
BUY CERTANTIES
“Buffett’s preference to “buy certainties at a discount.”
“Certainties” are defined by the predictability of a company’s
economics. The more predicable a company’s economics, the more certainty
we might have about its valuation”
INVESTMENT V/S SPECULATION
“An investment operation is one which, upon thorough
analysis, promises safety of principal and a satisfactory return. Operations
not meeting these requirements are speculative.
IDENTIFY MARGIN OF SAFETY
“Margin of Safety exists when securities are selling—for
whatever reason—at less than their real value”. If, for example, an analyst reviewed the operating history of a company and discovered that, on average, for the past five years the company was able to earn annually five times its fixed charges, then that
company’s bonds possessed a margin of safety. If the spread between the price of a stock and the intrinsic value of a company was large enough, the margin-of-safety
concept could be used to select stocks. Definition of intrinsic value is “that value which is determined by the facts.” These facts included a company’s assets, its earnings and dividends, and any future definite prospects.
MOST IMPORTANT FACTOR
“Single most important factor in determining a company’s value was its future earnings power, a calculation that is bound to be imprecise. Simply stated, a company’s intrinsic value could be found by estimating the earnings of the company and multiplying
the earnings by an appropriate capitalization factor. The company’s stability of earnings, assets, dividend policy, and financial health influenced this capitalization factor, or multiplier.Intrinsic value is distinct from the market’s quotation price. Originally, intrinsic
value was thought to be the same as a company’s book value, or the sum
of its real assets minus obligations. It is not essential to determine a company’s exact intrinsic value; instead, investors should accept an approximate measure or range of value. Even an approximate value, compared against the selling price, would be sufficient to gauge margin of safety.”
TWO RULES OF INVESTMENT,
“ Two rules of investing, said by Graham are
1) The first rule is don’t lose.
2) The second rule is don’t forget rule number one.
This “don’t lose” philosophy steered Graham toward two approaches for selecting common stocks that, when applied, adhered to the margin of safety. 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.”
TO BE CONTINUED TOMORROW.......
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