1977
Click here to read the letter🧠 Key Takeaways
When it comes to investing in stocks, think like a long-term business owner rather than a short-term trader.
When looking for a long-term investment, the company should be one you understand, run by people you can trust, with a solid long-term outlook, at an attractive price. If it meets all of that criteria, then it may be a solid choice.
✍️ Memorable Quotes
“Most of our large stock positions are going to be held for many years and the scorecard on our investment decisions will be provided by business results over that period, and not by prices on any given day. Just as it would be foolish to focus unduly on short-term prospects when acquiring an entire company, we think it equally unsound to become mesmerized by prospective near term earnings or recent trends in earnings when purchasing small pieces of a company.”
When it comes to investing in stocks, think like a long-term business owner rather than a short-term trader. In other words, instead of being swayed by short-term fluctuations in stock prices, which can happen with a great degree of volatility on any given day, focus on the long-term growth prospects of the companies you're investing in.
“We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price. We ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term. In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price.”
This is the blueprint for identifying which stocks to buy.
First and foremost, it has to be a company you understand. If you don’t understand it, then you won’t be able to accurately wrap your head around its risks and competitive advantages.
Second, you need to be confident that the company’s future will be brighter than its current position. If the company isn’t growing, then it’s on its way to dying, which doesn’t make for a great long-term investment.
Third, you need to have faith that the people running the company are being truthful and transparent. If there is any sign of foul-play or tomfoolery, then you may not be able to trust the management with your investment dollars, and you shouldn’t invest in something you can’t trust.
Finally, you want to invest in a company at a price that gives you a margin of safety. Unexpected risks will occur, especially if you plan to be a long-term investor in the company. By getting in at a good price, you allow yourself some room for error and the opportunity for bigger returns.
If you come across a stock that meets all these criteria, then it might be a solid choice. And if the share price drops after you buy, then it might be an opportunity to buy more shares at a discount and further increase your margin of safety.