SHARE INVESTING - THE SUCCESSFUL WAY
Investing Ė the way of the professional investors
"Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down." Warren Buffett
Share investing, when stripped of all its jargon, pretence and hype, is actually a fairly simple process. As investors, we are purchasing partial ownership of a business, and as a result are entitled to a portion of that company’s profits from now until perpetuity. In order for us to make an attractive return on our investment, we must either see an increase in that company’s earnings, or an increase in the price that the market is willing to pay for each dollar of those earnings. One tends to be relatively smooth and predictable - driven by the quality of the company’s product or service, management, and business strategy; whilst the other is inherently unpredictable - driven by mass psychology, fear and greed. Unfortunately, most investors ignore the former, and attempt in vain to predict the latter.
Value investing is the fundamental investment methodology that aims to shut out the ‘noise’ of short-term market movements, and focus instead on the intrinsic value of the company itself. True value investors such as Warren Buffett approach the market from a completely different perspective to most market participants. Whilst most investors ‘trade stocks’, value investors ‘buy businesses’. Whilst most investors purchase shares because of their weighting in a benchmark index, value investors aim to fully understand the drivers of a business, and only purchase those that have excellent economics, and attractive prospects for growth. Whilst most investors attempt to predict share price movements, value investors identify outstanding companies, and then wait patiently for the market to offer them an opportunity to purchase shares in them for less than their intrinsic value.
“Your goal as an investor should be to purchase, at a rational price, a part interest in an easily understandable business, with excellent economics and able, honest management, whose earnings are virtually certain to be materially higher five, ten and twenty years from now. When you see one that qualifies, you should buy a meaningful amount.” Warren Buffett (para-phrased slightly)
It is the patient application of this logical, long-term approach to the market that has helped Warren Buffett to become one of the world’s richest men, and undoubtedly the world’s greatest investor.
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