Having said all that lets ask the following question Does this mean we will

Having said all that lets ask the following question

This preview shows page 127 - 129 out of 263 pages.

Having said all that, let’s ask the following question: Does this mean we will never lose money if we do everything right? The answer is: You will almost certainly not do everything right at first, and then you may lose money. But if you start off slow and try to do it right, you can correct your mistakes and learn from them, and then you will make money. In fact, you will make enough money to more than cover the mistakes. This has been the experience of every great investor I know. We all make mistakes. But we learn and then we make fewer mistakes. One of the reasons I’m writing this book is to help you guys make fewer mistakes by showing you what works. It’s why I have my website up for you to use—so you’ll be able to learn in a few months what it has taken me twenty-five years to learn. Reducing the errors and the time to become expert is the whole point of an education. You and I are able to do that because we’re standing on the shoulders of great investors. Great investors, men like Mr. Graham and Mr. Buffett, know this: if you learn how the best investors have done it for the last hundred years and then you go do what they did, you will reap the reward they got, too. The key is to recognize that if you do this right, if you do this the way the best investors have always done it, you will succeed. FOR MAXIMUM PAYBACK, DOWN IS THE NEW UP Even after you buy into a business—unless you own all of it—you want the price of the part you don’t own (the part you haven’t bought yet) to go down. That’s right: Down . Not up. If it goes up, we do good. If it goes down, we get rich. I know that sounds crazy. But remember, our net worth is not about prices, at least not in the short term. It’s about value. If prices go down but we know what we’re doing, our net worth is going to go up big-time. We’re not expecting to cash out today or tomorrow. We know we’re investing for many years into the future. Therefore we want the price of any business or stock we stockpile to stay low so we can buy more of that great company at ever better prices. Assume that you find a business you really understand with great
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Moat and Management. Assume it has a conservative value of $20 a share, it’s selling for a Margin of Safety price of $10, and it has a Payback Time of eight years. You have $10,000 to invest and you buy 1,000 shares. Six months later you’ve managed to save another $10,000 and are looking for something to invest in, so you reconsider this business you love. But now it’s priced at $20, with a Payback Time of thirteen years. Nothing has fundamentally changed in its long-term value, but it no longer has a Margin of Safety, and Payback Time is too long. That means that you can’t buy any more with your $10,000. You are priced out of this stock. At the end of five years, the price is still at $20, and if you decide to sell you’ve doubled your money and made a 15 percent annual return on your 1,000 shares. Well done.
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  • Spring '20
  • Warren Buffett

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