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The business of value investing – Six essential elements to buying companies like Warren Buffett- Charlie Tian 2009
https://bbs.pinggu.org/thread-695143-1-1.html(Page 26-36)
Invest in the Business, buy the stock
Stock Prices are more noise than information, A business-like approach to valuation and Reality
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The majority of the time, daily stock prices are simply random noise movements. Warren Buffett has said that he invests as if stock markets would be closed for years. The truth is, most investors – and their portfolios — would be a lot better off if stock markets were closed throughout the year For one thing, many people would probably cease to participate. Those are the individuals who participate in the market for more speculative reasons. If you were looking to buy a small business, I doubt that you would buy it with the intention to sell it in a few months unless you were offered a most attractive offer. It’s doubtful you would sell it at the first hint of bad news. Stock investing should be handled the same way. If you invest and the market decides to reward you immediately, you can choose to sell a short - term investment if you feel the price reflects the company value. Conversely, don’t jump to sell because you see a decline in the stock price without first determining if the business has been permanently impaired. Most important, if markets were only open annually, investors would get really serious about which securities they would want to own. They would spend a lot more time understanding the businesses they invest in, because they would want to be absolutely sure that they were allocating their capital in the most intelligent fashion. In other words, they would invest in the business, not the stock.
Since markets are open every day with willing buyers and sellers, market participants often try to shortcut their way to investing. The shortcuts usually lead to a lot of short - term losses. One of the most “advantageous” aspects of the stock market — its liquidity — is actually also one of the worst. Knowing that you can sell your securities any time the mood strikes you is more of a detriment than a benefit. Equity markets do a great job of making smart people do some really dumb things. The idea that a security should be sold after three weeks or three months because the stock price has declined seems rather foolish. The greatest business success stories — Coca -Cola, McDonald ’ s, General Electric - evolved over decades with plenty of periods of temporary decline. Any investor who abandoned these companies at the first sign of trouble missed out on some extraordinary returns that were to come. It’s hard for most people to ignore the useless noise that the market produces day in and day out. Even if today you gave someone a copy of the Wall Street Journal two years into the future, most still wouldn’t profi t from the information. Why not? Because even knowing with 100 percent certainty that XYZ Corp. would be worth twice what is today, people would still jump ship if the price collapsed on them in the interim.
True value investors ignore such meaningless noise. To the value investor, stock markets have one sole purpose: to allow the purchase of undervalued securities and to facilitate the sale of fairly valued securities. Security prices are there to inform, not instruct. Security prices allow investors to determine whether bargain opportunities exist once the business has been analyzed and appraised. Conversely, when the mood is euphoric, security prices offer the opportunity to dispose of an investment at prices equal to or above fair value. Contrary to popular belief, most sound investments are made on the basis of very few rational decisions. The most illustrative example is the investment in the Washington Post Company made by Warren Buffett.
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Buffett’s phenomenal investment track record from 1956 to 1969 is why most are familiar with the success of the Buffett Partnerships, but that success had as much to do with what Buffett didn’t do as much as with what Buffett did do. In 1956, Warren Buffett started an investment partnership with capital from family and friends. Over the next 13 years, the annualized return clocked in at over 30 percent a year. More amazing, in the 13 years of operation, Buffett never recorded a down year. The length and consistency of this performance makes it one of the best performances by any investor. In 1969, Buffett closed down shop and walked away. Instead of taking in the loads of additional capital that would surely follow such a performance, Buffett instead wrote a letter to his partners telling them he no longer felt it was prudent to participate in the market: The investing environment . . . has generally become more negative and frustrating as time has passed. Maybe I am merely suffering from lack of mental flexibility . . . , However it seems to me that: (1) opportunities for investment that are open to the analyst who stresses quantitative factors have virtually disappeared, after rather steadily drying up over the past twenty years; (2) our $ 100 million of assets further eliminates a large portion of this seemingly barren investment world, since commitments of less than about $ 3 million cannot have a real impact on our overall performance, and virtually rules out companies with less than about $ 100 million of common stock at market value; and (3) a swelling interest in performance has created an increasingly short - term oriented and (in my opinion) more speculative market. Therefore before year end, I intend to give all limited partners the required formal notice of my intent to retire . . . Quite frankly . . . I would continue to operate the Partnership in 1970, or even 1971, if I had some really first class ideas. Some of you are going to ask, “What do you plan to do? ”I don’t have an answer to that question.
In this modern age of money management, no money manager walks away after a year in which his performance beat the market and leaves all new potential capital on the side. Instead, many fund managers are forced to shut down after poor results made even worse by excessive use of leverage. But Buffett felt that market valuations were vastly exceeding business values, so he put his money into bonds and walked away. While I’m sure Buffett was keeping up with markets, he didn’t seriously reappear until 1974. For five years, he simply ignored the stock market. He probably spent a lot of time
playing bridge, his favorite card game. Bridge, much like investing, requires making bets based on odds. It’s a fun and intellectually challenging game enjoyed by many investors. The key point is this: Sometimes success from investing comes from the fact that you are not investing at all. It’s a true sign of discipline to avoid the market if it doesn ’ t provide you with favorable risk/reward bets. Being an investor does not mean always being invested. Being an investor means taking action if and when your data and analysis tell you of quality businesses selling at valuations that, with a high degree of probability, will result in satisfactory returns over a period of years. The most expensive lessons in investing are typically a result of making too many investments, not too few. Value investors know how to be at peace with their decisions. Trying to invest through the rearview mirror is unproductive. In hindsight, everything to everyone seems obvious. Value investors understand that they will rarely invest at the absolute bottom price, nor will they sell at the absolute top price. Value investors seek to invest in a business only when it is undervalued and to sell it when it exceeds fair value. Any other approach is speculative in nature and often leads to expensive consequences. Case in point: Between 2001 and 2003, shares in Apple traded between $ 7 and $ 13 a share. Yet during those years, sales were slowly 14 The Business of Value Investing climbing, the company was paying off its debt, and cash flow was growing. In addition, Steve Jobs was introducing the iPod and revamping the product line with a slick, modern computer. Restless investors who were frustrated with the dormant stock price or, worse, sitting on paper losses, abandoned ship. They were blinded by the stock price movements. As a result, they failed to see the progress that the business was making. Businesses cannot control the economy; all they can do is keep operating soundly during the good and bad cycles. Over the next four years, shares in Apple leapt to a high of $ 203 a share. Frustrated investors paid an expensive price indeed. A Simple Idea,
If looking at investing as buying a piece of a business, you will avoid what you do not know and pay a sensible price. As Buffett quips, “Invest like you’re buying groceries, not perfume.” To be a successful investor, whether professionally or individually, you need to do only a few things right. First is to develop a sound investment philosophy. Once you have truly developed a mental framework that seeks to buy good businesses at low prices, you are significantly ahead of the pack. The notion that the stock market is the place to get rich quick causes a lot of grief for investors and leads to sloppy results. The value investing approach has been tried and tested for decades. It works. For those who are willing to exert the effort and patience, the stock market offers the greatest forum for wealth accumulation. It is also important that the framework and approach to participating in equities in a logical, business-like fashion that Ben Graham widely regarded as the creator of the school of thought that is value investing, astutely remarked in The Intelligent Investor : “Investment is most prudent when it is most business-like.” Just look at a corollary to Graham’s statement: Investment is most foolish when it is unbusiness-like.
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