Be fearful when others are greedy and greedy when others are fearful.
Not all businesses are created equal
"An economic franchise arises from a product or service that:
(1) Is needed or desired,
(2) Is thought by its customers to have no close substitute, and
(3) Is not subject to price regulation."
If the company under evaluation has enjoyed a long track record of greater than average returns on capital as well as profit margins then there is a good chance that the company qualifies for the definition of a 'franchise.'
Price is what you pay, value is what you get
"The value of any stock, bond or business today is determined by the cash inflows and outflows - discounted at an appropriate interest rate - that can be expected to occur during the remaining life of the asset. Note that the formula is the same for stocks as for bonds."
The technique mentioned about is also popularly known as the discounted cash flow, or the DCF.
Ignorance is bliss
"What counts for most people in investing is not how much they know, but rather how realistically they define what they don't know. An investor needs to do very few things right as long as he or she avoids big mistakes."
Tackling the 'forecaster' in you
"We insist on a margin of safety in our purchase price. If we calculate the value of a common stock to be only slightly higher than its price, we're not interested in buying. We believe this margin-of-safety principle, so strongly emphasized by Ben Graham, to be the cornerstone of investment success."
When you buy, please ensure that your DCF-based value per share is at least 50 per cent higher than the current share price so that even if your assumptions turn out to be little aggressive or something unexpected happens to the company, the loss of your initial invested amount is minimized.
The all-important 'SELL' decision
That solid 'franchise' that you bought two years ago and the one that had a strong margin of safety has given you attractive returns and now you wish to dump it. Dump you should if you've found another equally attractive opportunity in another equally strong 'franchise.'
But that is seldom the case. Furthermore, selling involves transaction costs. For these very reasons, it is against the concept of selling strong 'franchises' unless their performance looks weaker from a long-term perspective. This is what he has to say on the issue.
"If the work is done right while investing in a stock, the time to sell it is never." Furthermore, he adds, "Our holding period is forever."
We have someone who has walked the talk and has remained invested in business for years together. Indeed, the urge to sell is very high, but you would do your investment returns a world of good, if you continue to stick with good, solid 'franchises' for years together.
The golden rules
They are:
Rule #1: Do not lose money; and
Rule #2: Always remember the rule #1.
These are the principles which made Warren Buffet richest manon planet
