Because they have uncertain earnings potential some businesses may be

Because they have uncertain earnings potential some

This preview shows page 131 - 135 out of 263 pages.

Because they have uncertain earnings potential, some businesses may be overvalued at any price. Review the ten-year financial history and get a rear-view mirror look into businesses you understand. Gauge their future earnings potential and determine the Sticker Price. Buying investments at a significant margin of safety (MOS) will protect your minimum acceptable rate of return (MARR) when you eventually sell at or above retail value.
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Don’t confuse price with value. Always determine the retail value of a business and never pay it. Calculate the Margin of Safety price by using the free stockpiling tools found at PaybackTimeBook.com . Determine the payback time to get your money back. It will help you find price bubbles that MOS may not catch. * Big Coal , by Jeff Goodell.
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T EIGHT BABY STEPS to WEALTH Learning is not compulsory … neither is survival . —W. E DWARDS D EMING he purpose of stockpiling a business is to maximize our return on investment with the least effort and least risk possible. We stockpile a business by investing in a piece of a business at a Margin of Safety price. If the price goes down without fundamental change in the business, we buy more. Investment at the lower cost reduces our average investment cost, and our overall rate of return goes up. This is how the poor get rich and the rich get richer. Put simply, the essence of stockpiling is to turn a down price into an up return on investment. To turn your down into up , take these eight simple steps: STEP ONE: FIND IT
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You know what you’re looking for: A wonderful business. (If you aren’t sure what a wonderful business looks like, reread Chapter 3 and spend some time on my website.) Finding it is the first step to turning a down market into up returns. You’re looking for something very specific: a business in an industry you understand (Meaning) with a durable competitive advantage (Moat) and a CEO you trust (Management). Sometimes knowing what not to look for is the best place to start narrowing what to look for. I touched upon some of these red flags at the end of Chapter 3 . But now that we’re really ready to buy, let’s recap that list and go into a little more detail. Remember, if you’re going to stockpile, you really have to get all this stuff right. Which is why having a clear sense of all the red flags and being able to spot them quickly will save us a lot of time, effort, and of course, money. Red Flags List—Part II 1. No Meaning . Remember, if you’re not an expert in an industry, you don’t have any business owning a company in that industry. If you don’t understand the industry you are thinking of getting into, don’t go there until you do. See Chapter 3 . 2. No Moat . If there is no durable competitive advantage, don’t even consider it. Without a Moat, a business has to compete on price. If their hammer is just about as good as yours except it’s cheaper, you might find your customers buying theirs. That will force you to drop your price, too. If your competitor lives in China, he may be able to drop his price well below your cost. This is what happened to hardware stores in
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  • Spring '20
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