Investment guru Warren Buffett, a proponent of the value-based investing model, believes that people should invest in companies that exhibit solid fundamentals, strong earnings power, and the potential for continued growth.
- Don’t lose money.
- Don’t forget rule #1.
Warren Buffett states that there are just 2 rules of investing.
It focuses on investing based on certainty rather than speculation. Investing is about focusing on not losing money. It is about being certain of your investment that it won’t lose money because guessing, hoping, and praying is what the majority does. Phil Town has further elaborated this idea in his book, “The #1 Rule of Investing.”
The Basics
Be Certain –
When you buy a wonderful business at an attractive price, you are almost certain that you won’t lose money on the investment. It’s essentially like buying a $10 bill for five bucks.
What’s A Wonderful Business? –
It’s a business that you can understand the working of, a business that has strong ethical management which is focused on the growth of the business and preferably has a stake in it too. They also have the investor’s best interests in mind.
The Attractive Price –
For figuring out the attractive price of a business, we need to know the value of a business. An attractive price is any price that is below the actual value of the business. Investing this way we can be sure that we will make a profit once the price reaches its actual value. If a price is over the value of the business, then it’s not an attractive price as we would be speculating whether the price will go up or not. Keep in mind there is no guarantee that the price will reach its actual value. Companies remain undervalued for a long time.
As J.M. Keynes quotes – “The markets can remain irrational longer than you can remain solvent.”
How To Find A Wonderful Business – The 4 M’s
As per Phil Town, a wonderful business has 4 m’s –
- It is understandable – we call that the meaning of the business.
- It is durable – we call that the moat of the business.
- It has strong management – we call that the management factor.
Well, those are the 3 M’s; the last one is the Margin of safety.
Warren Buffett said, “The three most important words in investing are margin of safety.” That means to buy stuff on sale. That means to pay less than what it’s worth. That means to buy $10 bills for $5. That’s the whole secret to great investing.
Price and value are not the same things. Price is what you pay, real-world and value is what you get. The key to a good investment is buying a share at a lower price than the company’s company’s actual value. This difference in price and value is called the margin of safety, and it can be arrived at by discounting the future cash flows of a company.
As per Phil Town – following these 4 steps carefully may help you find a wonderful company that will help you practice the rule no.1 of investing, it’s i.e., don’t lose money!
The Zombie Value Of A Business –
Usually, when we are looking at businesses, we assume their worth by predicting their future cash flows, also called the margin of safety method, Phil Town has further elaborated this idea which we have already discussed above.
Well, have you ever wondered what is the value of a business if it were dead? Meaning a business at its current position, assuming it no longer carried out business! That’s called the Zombie value of a business (Tangible Value). Phil Town says, “If we can buy it cheaper than that, and it’s still a good business, then that would be a heck of a deal.”
How to Find Tangible Book Value of Business Per Share
The formula for figuring out tangible book value is straightforward.
Going over to the balance sheet, we can locate the total equity. Then we subtract the intangible assets (Goodwill). Then we subtract the cost in excess. What’s left is the tangible book value or what we call the zombie value of the business. If we can buy a business for the zombie value or less and it’s not a zombie, if it’s a wonderful business and it’s selling for less than zombie value, that’s a super good deal.
Using MarketXLS For Identifying Companies (Fundamental Analysis) –
With the MarketXLS add-in, you will be able to create highly flexible templates for the analysis of companies and stocks. Simply by changing the ticker in focus, you will be able to call vast amounts of data about a company into your spreadsheet. Alternatively, you can create spreadsheets to compare several companies you select by the metrics you specify. The list of MarketXLS functions that you can use inside our add-in for Microsoft Excel is continuously expanding.
The table above shows a very simple overview of how it works. A spreadsheet set up with relative time references will automatically update new values when the analyzed company publishes new financial reports. The last 12 months (“LY”) are beneficial, as they enable you to track trends in the company’s performance on an annual basis, without waiting for the fiscal year to end.
Take your investments research to the next level and power your fundamental analysis of stocks with easy-to-use MarketXLS functions today.
For more information, check out – https://www.marketxlswp.com/fundamental-analysis-of-stocks-marketxls/
Bottom Line:
The Rule #1 methodology is claimed to do wonders if you follow the steps correctly, but ample research and market experience is required to make the right bets and invest correctly so that you are almost certain of not losing any money. Leaving that aside, it isn’t impossible, as there are many real-world examples of successful investments using this methodology. MarketXLS can be your perfect companion in this journey as we have just the things you need to carry out your plan and much more. Good luck investing!
Disclaimer-
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None of the content published on marketxls.com constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The author is not offering any professional advice of any kind. The reader should consult a professional financial advisor to determine their suitability for any strategies discussed herein. The article is written for helping users collect the required information from various sources deemed to be an authority in their content. The trademarks if any are the property of their owners and no representations are made.
References –
https://www.ruleoneinvesting.com/blog/how-to-invest/how-to-invest-margin-of-safety-the-growth-rate/
https://www.ruleoneinvesting.com/blog/how-to-invest/how-to-invest-moat-a-durable-advantage
