Learn to invest with Buffett

Chapter 10

Chapter 2 Learn Buffett's investment secrets that never lose money
Chapter 2 Section 1 The margin of safety is more important than the price

Graham vehemently refutes this fallacy in the final chapter of The Intelligent Investor.The secret to making safe investments is the margin of safety.It has been 42 years since I read this article for the first time this year, but I still deeply believe in these four words.If investors do not pay attention to this simple principle, investors will slowly taste the taste of losses since 1990.

--Warren Buffett
Buffett believes that investors must pay attention to the margin of safety when investing in bonds.The margin of safety is more important than the price level.

We often hear such words from many investors: This stock has fallen to two yuan, where else can it fall?In Buffett's view, this kind of thinking ignores the intrinsic value of the enterprise itself and violates the law of margin of safety.Buffett believes that if corporate bonds do not have an economic moat and bond prices are not within the margin of safety, then investors should not invest regardless of whether bond prices are high or low.Even if it is a two-yuan stock, it is possible to lose money.Conversely, if a corporate bond is priced below its intrinsic value and within a margin of safety, investors can invest in the bond even if the bond is a bit expensive relative to other bonds.The stock price of Berkshire, where Buffett belongs, is very high.But there are still many investors who believe that Berkshire's stock is still undervalued, and they still want to buy Berkshire's stock.

In July 1989, the price of American Airlines common stock was $7 per share.At that time, Buffett felt that the aviation industry had high barriers to entry and was an oligopolistic industry, so the stock price was really cheap.So Buffett invested $50 million in American Airlines.However, due to the suicidal price strategies adopted by low-cost airlines and bankrupt airlines, when low-cost airlines want to gain market share, they will continue to cut prices; airlines also provide services below cost.It is this kind of vicious price competition that has led to an industry-wide disaster.American Airlines was thus dragged down.Almost all of the $3.58 million Buffett invested was in vain.The investment is one of Buffett's few failures.When Buffett gave a speech at the University of Florida Business School in 3.58, referring to this failed investment, Buffett said: "I bought those stocks because the price was very attractive, but it was by no means an attractive industry." Buffett also admitted at the time that he made the same mistake with Salomon Brothers stock.Buffett said that the stock itself is cheap and attractive, but that should be an industry that should be avoided.

The stock market bubble burst in 1929, and most stocks fell sharply.Many people want to take advantage of this opportunity to buy the bottom.Both Graham, the godfather of finance, and Fisher, a famous investor, have joined this bottom-hunting team.They feel that the stock price is really too low.Seeing so many cheap stocks, they couldn't help but sell them.However, contrary to expectations, they did not see the stock price turn around and rise, and the stock price continued to fall.As a result, this investment turned Graham from a rich man into a poor man with a lot of debts, and Fisher lost millions of dollars.

Investment motto:

If you want to analyze whether a company is worth investing in, the law of margin of safety is a constant principle.Never buy stocks just because they are cheap, and pay attention to their margin of safety.

(End of this chapter)