And so you buy You entered the business with a Buy In of 25 percent of the

And so you buy you entered the business with a buy in

This preview shows page 158 - 161 out of 263 pages.

And so you buy. You entered the business with a Buy-In of 25 percent of the capital allocated to this business. Your next purchase will be for the same amount as the first investment. Your third purchase will be for another 25 percent. The last 25 percent allocation is yours to split up however you want. You can go the whole 25 percent and be done; or if the stock seems to want to keep sliding, you can split up the last allocation and buy in pieces. Just keep the pieces big enough that the commission isn’t an issue—$2,500 or larger. Beware: If you buy $500 worth of a business and pay a $10 brokerage commission, the commission represents 2 percent of your investment. That’s a lot . Avoid purchases where the commission is a significant chunk (i.e., 1 percent or better) of the purchase . Whatever your initial Stockpile Price was—from 20 percent off the value for experienced stockpilers to 50 percent or more off the value for novices—it’s going to have to stay at or below your MOS to stockpile
Image of page 158
and it’s going to have to stay below a ten-year Payback Time. Although you want to get all of the capital you allocated to this business into the business, if you bought in at a 20 percent discount off the value, try to wait for an opportunity to buy the next allocation at 30 percent off value, the next at 40 percent off value, and the last at 50 percent off value. If the price continues down with no changes to fundamentals, then scrape together more capital and stockpile as much of this business as you can. If you made the Buy-In at 50 percent off value, you can continue to stockpile at or below that price. Of course, this isn’t a science. You can get your allocation of capital invested any way you want, as long as you follow the rules of price and value. What this sort of discipline does for you is increase your compounded rate of return in that investment. On one hand, we don’t expect to get many opportunities to buy wonderful businesses when they are on sale. On the other hand, we want to try to maximize our return when we do get the opportunity. As you saw in Chapter 1 , the compounded rate of return skyrockets when you get to stockpile at every dropping price. Once again, an example with a $10 bill says it all: If I sell you $10 of value (in the form of a $10 bill in this case) for $8 and you buy one, you have a nice 25 percent return with no risk and you made $2. If I sell you a second bill for $7, your return goes up to 33 percent and you made $5. Buy a third bill for $6 and your return goes up to 43 percent and you’ve made a profit of $9. Buy a fourth bill for $5 and your return goes up to 54 percent and your profit is $14. Buying these bills at every dropping price changed your rate of return from 25
Image of page 159
percent to 54 percent and your dollar return from $2 to $14, a 700 percent increase. And that is what we’re after. It takes discipline to buy like this. You’re going to miss getting allocations into your business if you wait for the price to drop and it doesn’t, but when it does, you reap the rewards big-time. In the next chapter
Image of page 160
Image of page 161

You've reached the end of your free preview.

Want to read all 263 pages?

  • Spring '20
  • Warren Buffett

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes
A+ icon
Ask Expert Tutors