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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 78-82)
Price paid determine value received
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Before investing, it is vital to understand the function the markets play. Stock markets are important only because they allow you to buy and sell ownership interests in businesses. Everything else is just noise. I like to say that the best investors are pretend investors: those who can pretend that the stock market does not exist. One of the best advantages of a stock market, liquidity, also happens to be one of the worst. Being able to buy and sell stock at the click of a mouse causes most investors more harm than good. Of course, if you find yourself in a financial bind and need access to capital, the liquidity of the stock market helps you, but I assume that you are investing capital that will not be needed for meaningful periods of time. In this case, the liquidity of the stock market is not as beneficial as you might think. Paying constant attention to the daily fluctuation in stock prices can influence you to make very poor investment decisions. As an investor, your goal is to let the market give you the opportunity to buy and sell at attractive prices, not instruct you on when to buy and sell. It is not uncommon for two investors investing in the same security to have materially different investment results, even to the extreme where one result is gain and the other is a loss. The reason is due to the price paid for the investment. Value investors approach the market as a proxy for determining whether security prices are undervalued, fairly valued, or overvalued. They don’t allow the market to formulate their investment decisions. This distinction between guidance and instruction is very subtle and often is blurred, especially when the market is experiencing periods of wide price fluctuations, or volatility.
It’s obvious that this individual was being influenced by the rapid decline in the stock price although the business was doing just fi ne. He let the market volatility instruct him and make him feel that he had made a mistake. Make no mistake, it’s not easy to watch your investment decline by 20 percent in a week or two and not feel like you have made a dumb move. Between September 15 and 19, 2008, the Dow Jones experienced one of the most volatile trading weeks in history. The mess created by the excessive and irresponsible mortgage and securitization practices came very close to creating a financial catastrophe. Whether you agree with the government bailout or not, without it, the market contagion that would have resulted would have made the 1987 stock market look like a dress rehearsal. On September 15, the Dow dropped over 500 points, or 4.4 percent, on news that insurance titan AIG was facing collapse. On Wednesday, the Dow declined another 450 points, or 4.1 percent. The fi nal two days of the week, the Dow gained nearly 800 points, or 8 percent, to leave the stock market average basically unchanged over the week. Had you let the price volatility instruct your decisions, you were selling during the drops out of fear and buying again at the end of the week when the mood became more optimistic. Without even realizing it, you were selling low and buying high. In fact, most equity portfolios were worth more at the end of the week as the two - day surge in the market recaptured the declines earlier in the week and then some. Investors would benefit remendously if they would remember to echo the sentiments of Bill Ruane and Richard Cuniff during moments of great market turmoil. Before succumbing to your emotions and rushing to sell at moments of pessimism (or buying at moments of jubilant optimism), step back and ask yourself whether the movement in the stock price reflects the intrinsic or true value of the business. Absent some discovery of fraud or any other illegal activity, a quick decline in stock price should not persuade you to head for the exit. Instead, you need to look at the business. If your fundamental thesis remains intact, then do nothing or buy more of a good thing for less.
Value investors often are credited with espousing the buy and hold approach to investing. Warren Buffett is famous for saying “My holding period is forever”, a buy and hold technique enables the greatest attribute of investing to play out: compounding. If you are constantly buying and selling stocks, the frictional costs — commissions, taxes, fees — will eat into your profits. Nothing is more valuable or sought after than a wonderful business that can deliver returns year in and year out. These investments allow you to sit back and enjoy the ride. However, the concept of buy and hold is not without its caveats. The most crucial one is the starting point of the buy process. Whenever you hear any serious investor advocate the concept of buy and hold, take the phrase a step further to mean buy at the right price and then hold. In value investing, the stock price is of extreme importance when entering and exiting an investment. When prices indicate that a good business is cheap, use it to your advantage to make a good investment. Conversely, when prices indicate that business values have exceeded intrinsic value, use the opportunity to sell the overvalued business and once again buy an undervalued business. At any other time, the stock price fluctuation is a distraction. To appreciate the significance of why valuation matters in choosing the right point to buy or sell, consider the 17 - year period from 1964 to 1981. Had you bought the stocks in the Dow Jones Industrial Average at the beginning of 1965 and held until 1981, your returns would have been non-existent.
阅读到的有价值信息的自我思考点评感想
During those 17 years, the Dow Jones started and ended at the same point. At the beginning of 1965, the Dow stood at about 875 points. Seventeen years later, the Dow was at 875. A buy and hold approach over that period would have effectively delivered a zero percent return – a negative return when you factor in decline in purchasing power over that period. Seventeen years is a significant amount of time. For many investors, it represents the bulk of their investment years and is certainly a long enough buy and hold period. Interestingly, the period from 1982 to 1999 turned into one of the greatest market periods in American history. The Dow Jones advanced more than tenfold, and a $ 100,000 investment in 1982 would have made you more than $ 1 million by the end of 1999. The starting point matters. While you can never expect to buy at the exact bottom (say, in 1982) and sell at the peak (as in 1999), you can avoid doing the exact opposite, which is what many investors did by buying in the late 1990s at inflated prices. Excited by the quick and unsustainable rise in stock prices fuelled by the Internet boom, investing turned into speculating motivated by greed rather than common sense business principles. A very good rule of thumb and decades of data suggest that the best starting points occur when the price to earnings (P/E) ratios are lower rather than higher. The P/E ratio is simply the share price of stock divided by the per - share earnings of a business. It represents how much investors are willing to pay for the future earnings of a business based on future business expectations. If a company’s shares trade at $20 and its earnings per share for the year are $2, then the P/E ratio is 10 (20/2). The inverse of the P/E ratio is known as the earnings yield or the percentage of earnings per share. As the lower the P/E ratio, the higher the earnings yield. Interestingly, you don’t need decades of data to tell you that it is more prudent (and more likely profitable) to look for quality businesses that are trading at lower P/Es. Anyone would rather pay $1 million for a business that earns $200,000 in profits versus one that earns $ 100,000, all else being equal. Similarly, the odds of favourable market returns increase when the general market has a lower P/E ratio. In business, you make money when you buy an asset, not when you sell it. By that I mean that if you buy low, odds are very strong that you will make money when it is time to sell. Occasionally there are periods when logic and discipline don’t matter, and you can buy at any price and sell at a better price. The Internet boom of the late 1990s and the housing bubble that started earlier this century are two examples that come to mind. But blindly participating in periods of excessive speculation ultimately ends up doing more harm than good to most participants. Employing a sound philosophy with regard to stock investing demands that you consider the price paid. In order to buy intelligently, you must know how to assess the value of the business. Investors need to recognize another important part of buying securities that has more to do with temperament than valuation. Recognize that very rarely will you make your purchase decisions at the very bottom. A true value - oriented investor doesn’t try to time markets but instead focuses on pricing stocks and buy it at the right time. It may not be the lowest but it is still under value or have room for price growth. As such, you will rarely ever buy at the absolute bottom or even sell at the absolute top. If you are fortunate to buy at the bottom and sell at the absolute top, understand that doing so involves a big dose of lucky timing. Prudent investors who devote serious time and effort to understanding and valuing a business will be able to buy at an undervalued price and sell at a higher price. A business-like investment approach characterized by a quantitative analysis of each individual company will significantly increase the probability that you buy at a low price and are thus able to sell later at a higher price. Investors must learn to be at peace with their investment decisions. You can do this only if you have truly focused on paying cheap prices for your investments.
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