Learn to invest with Buffett

Chapter 11

Chapter 2 Section 2 Margin of Safety Principle: "No Loss of Money" is the Standard
The concept of margin of safety can be used as a touchstone to help distinguish investment operations from speculative operations.

--Warren Buffett
—Graham told his students Buffett the two most important investment rules:
Rule number one: Never lose money.

Rule number two: Never forget rule number one.

Buffett has always followed the teachings of his mentor and adhered to the principle of "margin of safety". This is Buffett's investment secret that never loses money, and it is also the cornerstone of successful investment.

Graham, Buffett's mentor, believes that "margin of safety" is the core of value investing.Although the market price of a company's stock fluctuates, many companies have relatively stable intrinsic value.The intrinsic value of a stock is usually not equal to the current trading price.The value investment strategy based on the margin of safety means that investors compare the price difference between the company's intrinsic value and the company's stock price through the estimation of the company's intrinsic value. invest.

Finding a true margin of safety can be justified by data, strong reasoning, and a lot of practical experience.Under normal conditions, the margin of safety of ordinary common stocks purchased for investment is their expected profitability substantially in excess of prevailing bond rates.

Graham noted: "The stock market problem particularly favors investors who invest in undervalued stocks. First, the stock market generates a large number of truly undervalued stocks for investors to choose from at almost any time. Then, after they are ignoring, and running against the investor's desired value for a considerable time to test his firmness, the market will, in most cases, raise its price to a level commensurate with the value it represents. Rational Investors really have no reason to complain about the abnormality of the stock market, because in its abnormality lies opportunity and ultimate profit."

In essence, fundamentally speaking, price fluctuations have only one important meaning for real investors: when the price falls sharply, it provides investors with the opportunity to buy at a low price; when the price rises sharply, it provides investors with an opportunity to sell at a high price. opportunity.

If you ignore the margin of safety, even if you buy the stocks of very good companies, if the buying price is too high, it will be difficult to make a profit.

You can overpay even for the best companies.The risk of overpaying has often arisen, and is now considerable for virtually all stocks, including those of companies whose competitive advantages are not necessarily sustainable over the long term.Investors need to be soberly aware that buying stocks in an overheated market, even if it is a particularly good company's stock, may have to wait for a longer period of time before the value that the company can achieve can grow to the level of investment. The price paid by investors is equivalent to the share price.

Margin of safety is the most important thing in investing.It can:

1. Reduce investment risk.

2. Reduce the risk of misforecasting.

If investors leave a sufficient margin of safety in the purchase price, it will not only reduce the investment risk caused by the wrong prediction, but also reduce the purchase cost when the prediction is basically correct, and obtain funds under the premise of ensuring the safety of the principal. Stable return on investment.
The investment return of value investment based on the margin of safety is not directly proportional to the risk but inversely proportional. The lower the risk, the higher the return.

In the value investment method, if you buy a dollar bill at 60 cents, the risk is greater than buying a dollar bill at 1 cents, but the expected return of the latter is higher. Value-oriented investment portfolio , the higher the reward potential, the lower the risk.

In 1973, the total market value of The Washington Post Company was $8000 million. On this day, you could sell its assets to any one of ten buyers for no less than $4 million, or even more. high.The company owns The Washington Post, Newsweek, and several major TV stations, assets that are currently valued at $20 billion, so a buyer willing to pay $4 million isn't crazy.Now if the stock price continues to fall, the market value of the business falls from $8000 million to $4000 million.Lower prices mean more risk, in fact, if you can buy several seriously undervalued stocks, and you are proficient in company valuation, then buying $8000 million worth of assets for $4 million is especially important. It is to buy 800 assets worth 10 million US dollars at a price of 4000 million US dollars, basically without risk.Since you can't directly manage $4 million in assets, you want to be sure that finding honest and capable managers is not difficult.At the same time, you must have the corresponding knowledge, so that you can roughly and accurately evaluate the intrinsic value of the enterprise, but you don't need to evaluate the value very precisely, that is, you have a margin of safety.You don't have to try to buy an $8000 million business for $8300 million, you have to allow yourself a big margin of safety.

We insist on leaving a margin of safety on the purchase price.If we calculate that a common stock is worth only slightly more than its price, then we have no interest in buying.This principle of "margin of safety" -- a point emphatically emphasized by Ben Graham -- is the cornerstone of successful investing.

It is important for investors to understand the margin of safety for each business they purchase.If you can't get a price that meets the margin of safety, don't buy it.If a genius like Buffett insists on a margin of safety, don't you think investors should too?Margins of safety can make big money for investors when done right.And when things go wrong, it protects investors from losses.

Investment motto:

The margin of safety is a kind of prevention and deduction for the limited ability of investors, the uncertainty of huge fluctuations in the stock market, and the uncertainty of the company's development.With a large margin of safety, even if there is a certain error in the evaluation of the company's value, the market price will still be lower than the value for a long period of time, even if the company's development suffers temporary setbacks, it will not hinder the safety of investors' investment capital. , and can guarantee investors to obtain the minimum satisfactory rate of return.

(End of this chapter)