Warren Buffett said, “Be certain,” and here’s how you’re going to be certain. If you buy a wonderful business at an attractive price, you’re certain to make money. It’s essentially like buying a $10 dollar bill for five bucks. You focus on a couple of key things to make sure you know what you’re getting.
So, what is a wonderful business?
A wonderful business is understandable, and we’re passionate about it. We call that the meaning of the business. It’s durable, we call that the moat. Like the water around a castle protects it from attack.
The CEO is honest, passionate, and owner-oriented, and we call that management. Those are the first three M’s. We make sure that we understand all three M’s before we go forward, then we look at the price.
Ben Graham, who taught Warren Buffett how to do this said, “The three most important words in investing are margin of safety”.
The margin of safety is a measure of how “on sale” a company’s stock price is compared to the true value of the company.
You need to be able to determine the value of a company and from that value determine a “buy price”. The difference between the two is the margin of safety. The goal is to find wonderful companies for 50% off their actual value. This allows you to purchase a company when it is undervalued at a price that all but guarantees a great return on your investment.
This week on InvestED, Phil and Danielle discuss Phil’s investing checklist in-depth and explain why it is the essence of Rule #1 Investing, as well as value investing as a whole.
If you want to learn more about the Four Ms of Rule #1 Investing, check out this guide where I explain these principles more in-depth: https://bit.ly/3eZYvPQ
Topics discussed in this episode:
- Warren Buffett
- Charlie Munger
- Valuation methods of investing
- Rational investing
- The Four Ms of investing
- How to pick stocks
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