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This book is truly full of little bits of gold.
First of all - Kenetih Fisher’s forward is incredibly wise. He encourages people to do things they’re good at (what Bufett would describe as the “sphere of competence”) rather than blind copying what other people do. Fisher believes that he wouldn’t be as successful if he simply copy his dad’s method, or Bufett’s method (Buffett, commenting on Peter Lynch’s method, also said the same thing. That Buffett prefer buying few stocks - even better, buying the whole company, but only small number of those companies - while Lynch prefer buying boat load of stocks. Buffett believes that he wouldn’t be as successful as Lynch - and vice versa - if they switch to each others’ strategies).
Second of all - as echoed by value investors over and over again - one ought to look at stock not as a pattern forming lines, but rather as a true business underneath. A comparative advantage of a good investor is that such investor understands how such business is runned, can have a great understanding with high certainty of how such business would perform in the future (Buffett shy away from companies he can’t predict how’d perform in the future). I personally believe that an investor can only gain such insight by listening to his inner voice, and also do work in a sector that has relatable business similarities with the business the investor is studying.
Third of all - timing. The author noted that the best money is to be made when one understands the company one studies, and only buy when a temporary set back (could be a bad year, or several years. Could be a false rumor, a scandal etc) causes the stock price to be sold at a discount price. The price could be discounted for a very long time. But if the fundamentals are sound, eventually the stock will reflect its intrinsic value (which I would add, if the stock is so discounted for so long, one probably can just gobble up all the outstanding stock until one owns the entire company).
Fourth of all - company selections.
One ought to look at quality more than just the cheapness of the stock. An outstanding company could weather a storm much better than a very cheaply discounted stock. In addition, a cheap, low quality stock could easily bring investors many unintended headaches down the road. Sometimes making as much money as possible does not in fact make you as much as possible.
Buffett defines a quality company with several traits. For one, he looks for the integrity of the company. He prefers the management to be blunt about their blunders. He also looks for managers who are themselves contrarians - that they are dissuaded when a herd moves to a fad. He also looks for managers who prefer to grow the company organically with as minimal debt as possible. In terms of cost management, he looks for companies that always control cost, not just during “cost control” fads where every CEOs begins laying off people for the sake of laying off people. Lastly, in terms of accounting, he looks for companies that don't bury things underneath footnotes and expenses the things that ought to be expensed.
In terms of searching for such a company, reading annual reports is a good start. It’s very beneficial to study competitors in the field, and understand why one company performs better than others. Buffett prefers companies that have a moat: that is, the company has a product that other companies can’t simply replicate. A company without a moat would have to sell their product as commodities. Which means during a down cycle, profit margin could easily become slim to none. A company with a moat could charge a premium because they have the reason for customers to pay extra.
In terms of managing a company (if you own the controlling stake of the company): it’s important to hire the best people and (to quote Tina Fey) “get the hell out”. In addition, it’s important to see how managers manage their extra revenue. Sometimes when managers simply don’t have a good place to park their cash, Buffett believes stock buy-back is a preferred option. To do things just for the sake of doing things is nonsensical. Buffett also parks significant amounts of money in short term government bonds - when opportunities come, one must have the firepower to take advantage of it.
When studying a company, it’s important to not just study the most recent few quarters and jump on the bandwagon, but rather to study as far back as possible. Temporarily set back and growth could just be temporarily. Longer term track record gives you a much better picture of what things are like for such a company.
- In essence, perhaps over the aggregate long run, market would price things rather fairly. However, over the short run, the market almost never price things correctly: at times it would be too expensive, and at times it would be too cheap. The trick here is to innately understand what you know, and only stick to what you know (what Buffett calls "the sphere of competence). And when something you know is worth a certain amount is selling at a heavy discount (the discount is what Buffett calls "the margin of safty"), that's when you buy (Buffett tends to buy the whole company over just shares of companies, because he prefer having control over the company). However, you compare that to your next avaliable risk free return (Buffett either use 10 years treasury yield, or if the yield is too low, the aggregate long term stock return).
- Things does change - in fact, it change all the time. But the importance here is to know that things never change as fast as people think. It works just the same as demise as well as accend. For instance, the rise of the internet was seen as a certainty. However, when bought into it too early, the possible output of the internet can't be realized quickly enough. Which leads to buying something too expensive resulting lower return. On the other hand, things that are deem to be obsolete might not die as quickly either. If the price is low enough, it's rather easy to make back the principle with a hefty return rate. Not to mention, many times as times goes on, there will be new uses to be thought of, of the said obsolete asset. An obsolete asset often can have clever ways to adapt to have new usages (old manufacturing plants convert into luxury homes "Loft", for example).
- Economic news/macro news that happens quickly are almost always noises, regardless which side you sit on. However, macro trends over the long term does determine the long term validity of a company (for instance, Berkshire Hathaway was initially a textile company that struggled immensely as textile moved overseas). Finding a good company isn't only just about finding a bargain with superb management. It's also about finding an industry that over the long term does have potentials (however, using the margin of safty, even if it doesn't have potentials, one could potentially still walk away with a hefty - however potentially higher - profits)
First of all - Kenetih Fisher’s forward is incredibly wise. He encourages people to do things they’re good at (what Bufett would describe as the “sphere of competence”) rather than blind copying what other people do. Fisher believes that he wouldn’t be as successful if he simply copy his dad’s method, or Bufett’s method (Buffett, commenting on Peter Lynch’s method, also said the same thing. That Buffett prefer buying few stocks - even better, buying the whole company, but only small number of those companies - while Lynch prefer buying boat load of stocks. Buffett believes that he wouldn’t be as successful as Lynch - and vice versa - if they switch to each others’ strategies).
Second of all - as echoed by value investors over and over again - one ought to look at stock not as a pattern forming lines, but rather as a true business underneath. A comparative advantage of a good investor is that such investor understands how such business is runned, can have a great understanding with high certainty of how such business would perform in the future (Buffett shy away from companies he can’t predict how’d perform in the future). I personally believe that an investor can only gain such insight by listening to his inner voice, and also do work in a sector that has relatable business similarities with the business the investor is studying.
Third of all - timing. The author noted that the best money is to be made when one understands the company one studies, and only buy when a temporary set back (could be a bad year, or several years. Could be a false rumor, a scandal etc) causes the stock price to be sold at a discount price. The price could be discounted for a very long time. But if the fundamentals are sound, eventually the stock will reflect its intrinsic value (which I would add, if the stock is so discounted for so long, one probably can just gobble up all the outstanding stock until one owns the entire company).
Fourth of all - company selections.
One ought to look at quality more than just the cheapness of the stock. An outstanding company could weather a storm much better than a very cheaply discounted stock. In addition, a cheap, low quality stock could easily bring investors many unintended headaches down the road. Sometimes making as much money as possible does not in fact make you as much as possible.
Buffett defines a quality company with several traits. For one, he looks for the integrity of the company. He prefers the management to be blunt about their blunders. He also looks for managers who are themselves contrarians - that they are dissuaded when a herd moves to a fad. He also looks for managers who prefer to grow the company organically with as minimal debt as possible. In terms of cost management, he looks for companies that always control cost, not just during “cost control” fads where every CEOs begins laying off people for the sake of laying off people. Lastly, in terms of accounting, he looks for companies that don't bury things underneath footnotes and expenses the things that ought to be expensed.
In terms of searching for such a company, reading annual reports is a good start. It’s very beneficial to study competitors in the field, and understand why one company performs better than others. Buffett prefers companies that have a moat: that is, the company has a product that other companies can’t simply replicate. A company without a moat would have to sell their product as commodities. Which means during a down cycle, profit margin could easily become slim to none. A company with a moat could charge a premium because they have the reason for customers to pay extra.
In terms of managing a company (if you own the controlling stake of the company): it’s important to hire the best people and (to quote Tina Fey) “get the hell out”. In addition, it’s important to see how managers manage their extra revenue. Sometimes when managers simply don’t have a good place to park their cash, Buffett believes stock buy-back is a preferred option. To do things just for the sake of doing things is nonsensical. Buffett also parks significant amounts of money in short term government bonds - when opportunities come, one must have the firepower to take advantage of it.
When studying a company, it’s important to not just study the most recent few quarters and jump on the bandwagon, but rather to study as far back as possible. Temporarily set back and growth could just be temporarily. Longer term track record gives you a much better picture of what things are like for such a company.
- In essence, perhaps over the aggregate long run, market would price things rather fairly. However, over the short run, the market almost never price things correctly: at times it would be too expensive, and at times it would be too cheap. The trick here is to innately understand what you know, and only stick to what you know (what Buffett calls "the sphere of competence). And when something you know is worth a certain amount is selling at a heavy discount (the discount is what Buffett calls "the margin of safty"), that's when you buy (Buffett tends to buy the whole company over just shares of companies, because he prefer having control over the company). However, you compare that to your next avaliable risk free return (Buffett either use 10 years treasury yield, or if the yield is too low, the aggregate long term stock return).
- Things does change - in fact, it change all the time. But the importance here is to know that things never change as fast as people think. It works just the same as demise as well as accend. For instance, the rise of the internet was seen as a certainty. However, when bought into it too early, the possible output of the internet can't be realized quickly enough. Which leads to buying something too expensive resulting lower return. On the other hand, things that are deem to be obsolete might not die as quickly either. If the price is low enough, it's rather easy to make back the principle with a hefty return rate. Not to mention, many times as times goes on, there will be new uses to be thought of, of the said obsolete asset. An obsolete asset often can have clever ways to adapt to have new usages (old manufacturing plants convert into luxury homes "Loft", for example).
- Economic news/macro news that happens quickly are almost always noises, regardless which side you sit on. However, macro trends over the long term does determine the long term validity of a company (for instance, Berkshire Hathaway was initially a textile company that struggled immensely as textile moved overseas). Finding a good company isn't only just about finding a bargain with superb management. It's also about finding an industry that over the long term does have potentials (however, using the margin of safty, even if it doesn't have potentials, one could potentially still walk away with a hefty - however potentially higher - profits)
