Tutorial 31-35 Recap
1) KEEPING STOCK VALUATIONS SIMPLE - you don't need complex valuation models to pick winning stocks. It's important to identify the key drivers of a stocks performance and to work out whether the stock is cheap or reasonably priced. It far better to be approximately right than precisely wrong. Spend time understanding how the business works, how it interacts in its ecosystem and the risks rather than building a model out to five decimal places.
2) MARGIN OF SAFETY - The Investment Masters seek a margin of safety in their investments. They try to buy stocks at a price which allows them downside protection should something go wrong. All investors make mistakes and by having a margin of safety, using conservative forecasts and by not paying too much you should be able to protect capital which is the number one rule of investing.
3) PRIVATE MARKET VALUE - The Investment Masters look at stocks as small pieces of a business not just a piece of paper. Many of the Investment Masters look at what the business would be worth to a private buyer looking to buy the entire business. Stock prices can fluctuate significantly due to investor emotions providing an opportunity to buy a piece of a business at a discount to what a private buyer might pay. In time, if a business trades at a significant discount, its more likely a private buyer will show up.
4) TIME ARB - Time arb [arbitrage] refers to the practice of seeking to make returns from taking a longer term view. The short term nature of most investors means they are focussed on the next quarterly report rather than what the business will look like in a few years time. A business today maybe trading at a significant discount to what it should be worth in a few years because of the short term focus of the market. Investment Masters look to take advantage of this pricing inefficiency.
5) LOW RATES - The Investment Masters recognise that low rates tend to inflate asset values and yet low rates can always become higher rates. Investors priced 30 year government bonds in the 1980's at a yield of over 15%. The market was pricing the bonds on the basis rates would stay high for 30 years. Clearly that didn't happen. Be careful not to overpay for assets on the basis that rates will remain low indefinitely.