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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 19-26)
Introduction & Invest in the Business, buy the stock; Stock Prices are more noise than information
阅读到的有价值的内容段落摘录
How to think about investing intelligently? Due to the unrivalled success of investor Warren Buffett, value investing has become the only intelligent manner in which to approach investing. The philosophies of value investing emphasize an approach that focuses on preservation of capital, risk aversion, discipline, and avoidance of crowd psychology. Contrary to the academic belief that greater return can only be achieved by taking on greater risk, value investing confirms that returns can be maximized by taking on very little relative risk. Reciting the value investing rhetoric is one thing, but doing it is something else entirely. Value investor Seth Klarman of the Baupost Group suggests that the philosophies of value investing may very well be genetically determined: “When you first learn of the value approach, it either resonates with you or it doesn’t.” My interpretation of Klarman’s assessment is that the foundations of value investing — patience, discipline, and risk aversion —aren’t subjects that are taught in school. You either possess them or you don’t. Business schools can teach how to analyze a business and how to value a business, but they can’t teach your patience or discipline to say no to a popular security. More so, business schools can’t teach you to have the courage to make a significant investment during the maximum point of pessimism. Education is invaluable and certainly aids in investment success, but it’s not the sole determinant of investing acumen.
To define and examine the essential framework that encompasses the foundation of value investing, like a golf swing, value investing is most effective when mastery of the essential elements come together to produce a consistently reliable result. It centers on the concept that successful value investors have an ingrained mental framework through which all investment decisions are contemplated. This framework stems from Benjamin Graham, who told us in The Intelligent Investor that “investment is most intelligent when it is most business like.” When examining the performance and method of operation for today ’ s most successful investors — Warren Buffett, Mason Hawkins, Seth Klarman, Bruce Berkowitz, and others — their results stem from their ability to consistently apply the same fundamental approach to investing time and time again. In analyzing such an approach, the central concepts of value investing come down to six fundamental elements. For value investing to be intelligent and successful, six essential elements are required. Analyze the investment approach of any successful value - oriented investor and you will observe that, like water, the basic elements exist. While these elements can be identified individually, it’s critical to understand that all six elements come together to form a complete mental framework. Of even greater value, they can serve to spot any faults or mistakes that were made in making an investment. Find an investment mistake that you made and odds are that one of these elements was compromised.
These six elements in order are:
1. Develop a sound investment philosophy.
2. Have a good search strategy.
3. Know how to value a business and assess the quality of management.
4. Have the discipline to say no.
5. Practice the art of patience.
6. Have the courage to make a significant investment at the point of maximum pessimism.
Successful investors take the above six elements and incorporate them in their investment decision making. The order is significant. Potential investors should not even attempt to seriously invest without first developing a sound investment philosophy. Developing such a sound philosophy — loss avoidance, risk aversion, avoidance of crowd psychology, and staying within one ’ s circle of competence — is the fundamental building block for everything going forward. A successful and fruitful search strategy won’t succeed unless it incorporates a sound investment philosophy. Going down the list, it becomes apparent that one element cannot be successfully applied without the one preceding it. But as a whole, these elements come together to create the essential mental framework that is found inside the most successful minds in investing.
To start with the initial focus is on the two ways to approach any investment opportunity. First, investors should look at stocks as a fractional interest in an entire business. The stock is the instrument that is bought; the business is the entity you own and will determine your long-term investment outcome. Investors often confuse this distinction, the result of which leads to expensive and unnecessary investment mistakes. Later an overview of the six elements, with and then crystallizes the thesis of this book by examining three investment case studies, and then concludes with reasons for why many investors stumble time and time again. Finally, will elaborate how to create an investment partnership. I thought long and hard about adding this but decided to write it after remembering the wonderful help I received that enabled me to go into business for myself. For the new student of value investing, this book aims to provide a clear and concise illustration of the fundamental tenets of value investing, which are ingrained in the mind and psyche of every successful value investor. For the more advanced student and the active professional, The Business of Value Investing endeavors to add to the never-ending process of constant learning and application. In the investment management business, eating one’s own cooking should be the standard not the exception. The investment manager who has his own capital invested alongside his clients is a powerful sign of alignment of interests. There is no reason why this viewpoint should not spill over to an author who is recommending an investment approach.
阅读到的有价值信息的自我思考点评感想
Charlie (the author) realized that while I was buying good businesses that he understood, he let the moving stock price instruct him as to when to buy and sell. One specific deal that crystallized these thoughts was Charlie’s 2002 investment in a company called Meridian Medical Technologies. It was a good profitable business, but unfortunately, he was not around to reap the benefits of those profits. Rather, he gave in to Mr. Market at the first sign of trouble. I wrote about this experience in one of my first letters to my limited partners. This experience taught me two very important lessons immediately. The first was to accept the fact that investment decisions should be made based on the value of the underlying business, not according to the short - term movements in the stock price. Investors have to learn to come to terms with their decisions. If you can, then assuming you understand and have properly valued the business, you aren’t swayed when the stock price of your investment declines 20 percent. Business valuation is both art and skill; I go over valuing a business in greater detail later in this book. Financial markets constantly quote prices others are willing to pay on any given day for a business, usually to the detriment of most investors. Ninety percent of the time, market prices are useless. They serve to distract investors from looking at the whole business and instead lead them to focus on the day - to - day price movements of a ticker symbol. As a result, investors often confuse market value with business value, leading to poor decision making and expensive mistakes. All too often, the terms “luck” and “skill” are tossed around the investment field inaccurately. The truth is that investment skill will always lead to certain moments of luck, but in the long term, luck alone simply cannot last long enough to produce a consistent, profitable result. The second important lesson I learned is to think independently
and rely on your own data. My mistake in Meridian was very fundamental: I let the crowd dictate my decision making. My mistake was not that I was wrong but that I decided that the stock price decline implied that I was wrong. I thought I had invested in the business, but I was really invested in the stock. My analysis was sound: a good business with a good product and a market leader with a strong operating performance. But my approach toward the business was far from sound; I let the noise from the market weaken my conviction of the business value.
Warren Buffett has often said that “investing is simple, but not easy to do.” It is believed that one of the things he was referring to was the difficulty many people have separating the value of the business from the price of the stock. You should not equate the value of businesses with the daily volatility of stock prices. For the most part, the market gets it right and generally values businesses fairly. As a value investor, you are not interested in buying fairly valued businesses; you are focused only on selecting undervalued businesses. The stock market should exist only for you to buy an undervalued business and to sell a fairly valued business.
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