Value investors can largely get by without complicated mathematical formulas, in that adherents of value-based investing simply rely on common sense. And on patience.
In principle, the simpler and more boring the business model, the more interesting it is for value investors. You buy shares in solid companies run by honest and capable people, and at a price that is below fair value, i.e. does not (yet) reflect the company’s earnings potential….
“Make it simple, not complicated: pick companies with comprehensible business models that will last.“
Warren Buffett believes that you should not dwell on market forecasts or charts, but above all read the companies’ annual reports. There you will find everything a value investor needs to know about the company, and there he will find the figures and data he needs to evaluate the company and determine its fair value. And he advises only putting money into companies whose business you understand.
“You should put your money into companies that even an absolute moron could run. Because at some point, that’s inevitably what’s going to happen.“
Do like Warren Buffett, don’t make it unnecessarily complicated. Intelligent investing is not a science, it is solid craftsmanship using a few but important rules. You don’t have to be able to work magic to make money in the stock market over the long term.
“If you want to invest in a company, you should be able to explain why. And do it in simple language that a fifth grader could understand, and fast enough so the fifth grader doesn’t get bored.“
Peter Lynch advises buying what you know. And that in a double sense: not only brands or products from one’s own environment, but companies that one knows, that one has understood, that one can explain. Not in every detail, but so well that you can explain quickly and to the point what the company does and how it earns its money. And what makes it special compared to its main competitors.
“If a company does well, the stock will eventually follow.“
In the long term, stock market prices always rise
At the same time, one should (also) not concern oneself with the search for perfect timing, the best time to enter. Because in the long run, it hardly makes a difference at which point in time you invested in shares, in the long run, prices rise almost unstoppably. Economic progress, the growth of the world’s population and the (also therefore) globally increasing prosperity are reflected in the share price development.
“In the long run, stock markets will provide good news. In the 20th century, the U.S. went through two world wars and other traumatic and costly military conflicts, a depression, several recessions, stock market panics, oil shocks, virus pandemics, and the resignation of a presi
IDENTIFIED. Nevertheless, the Dow Jones rose from 66 to 11,497.“
Wall of Worry. Or: Was there something?
Source: Stock Exchange Online
In the process, equities beat all other forms of investment by far over the long term. The chart shows the development until the end of 2018, when prices once again fell sharply. In 2019, the stock markets boomed, 2020 brought the “corona flash crash” followed by a V-shaped recovery, and in 2021 the stock markets continued to rise, while the wheat was already being separated from the chaff in the technology sector. And since mid-November 2021, the stock markets have been rattling hard, and since mid-February, the Ukraine war has once again put prices under noticeable pressure. And yet the stock markets are proving robust, despite the interest rate turnaround, the energy price shock and all the other bricks in the “Wall of Worry”. From this development, we can learn that market timing is a negligible factor for sustained stock market success, while another character trait contributes significantly to success: patience, the “supreme virtue of the investor” according to Benjamin Graham. Based on the S&P 500, the risk of losing money with stocks is statistically reduced to zero if you hold out for at least 12 years and do not sell your stocks. Clearly, patience is rewarded!
“The best time to invest is when you have money. Indeed, history suggests that it is not timing that counts, but time
(Sir John Templeton)
So investors should go for the simple, straightforward companies and then take their sweet time until they perform well. Stock prices will almost inevitably follow the progress in operations.
My reading tips
▶ “Buffett.The Story of an American Capitalist” by Roger Lowenstein
▶ “The Tao of Warren Buffett” by Mary Buffett and David Clark
▶ “The Essays of Warren Buffett: The Most Important Lessons for Investors” by Lawrence A. Cunningham
▶ “Investing with Warren Buffett.Secure Profits with the Focus Strategy” by Robert G. Hagstrom
▶ “How Warren Buffett Reads Corporate Numbers” by Mary Buffett and David Clark
▶ “How Warren Buffett Does It: 24 Simple Investing Strategies” by James Pardoe
▶ “Warren Buffett.Life is like a snowball” by Alice Schroeder
▶ “Warren Buffett – The Capitalist of the Century” by Gisela Baur
▶ “Warren Buffett: His Way. His method. His strategy.
” by Robert G. Hagstrom
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