This is of course exactly what Mr Buffett did to compound at 24 percent per

This is of course exactly what mr buffett did to

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This is, of course, exactly what Mr. Buffett did to compound at 24 percent per year and make billions. And for the second time in my investing lifetime, we’re seeing the S&P 500 PE ratio heading toward single digits. The first time was when I had just begun investing in 1980, and it made me rich. So we have the opportunity of a lifetime in front of us, the opportunity to stockpile the right businesses in the right market environment at the right time. Okay, now let’s get down to some specifics. How do you figure out the value of the business you want to stockpile? Don’t worry yet about how much you should be investing in those companies, or how many companies you should aim to have in your portfolio. I’ll get to all those details in the next chapter . For now, we have to nail down the process of finding value and comparing it with price. Take your time reading and rereading this chapter. You may also want to use my website to follow along with the analysis described below, because I’ve created more examples online than I could fit here. Check out PaybackTimeBook.com . Walking yourself through those examples will give you a pretty good idea how I get to the value—what I call “Sticker Price”—for a business. I’ve even included some examples of companies I can’t get a Sticker Price for. If you like, you can make this more fun by choosing a company aligned with your passions and interests (a business that passes the first M test) rather than the ones I’ve
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chosen here or on the website and seeing how your numbers match up to my view of a wonderful company. Remember: price and value are two entirely different things. It’s not hard to understand why everyone gets value and price mixed up. The two words are confused and misapplied almost every day. Flip on the television and you’ll hear experts who are discussing the price of a stock refer to it as the stock’s value. “What’s the market say the value of AT&T is today, Bob?” “How is the market valuing Apple right now?” If the experts are confused about the two words, is it any surprise that most investors are, too? Professional investors are under pressure to perform quarter to quarter. They can’t take the long view. They can’t buy into a business and focus on its long-term value. They have to focus on the price today . If the price goes down after they buy, the paper loss has an immediate negative effect on their quarterly earnings report. That the value of the business may be far more than the amount they paid gives them no comfort at all. They know they’re judged on how well they’re doing against everyone else this quarter based on price, not value. Someday this stock’s price will indeed shoot up, if they bought it at a discount against value, but that fact is absolutely worthless to them. They have to take the “price” view because if they don’t, all you mutual fund investors are going to pull your money out and give it to some other fund manager. Being right about the value in the long term doesn’t make you feel so great if you’ve lost your job in the short term because of the price.
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  • Spring '20
  • Warren Buffett

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