Learn to invest with Buffett

Chapter 26

Chapter 4 Section 4 The Golden Triangle of Value Investing Success

Valuing a business is part art, part science.

--Warren Buffett
Buffett believes that while investors are learning about company valuation and correctly viewing market fluctuations, they must develop a suitable personality and think carefully about companies that you can fully understand after you really work hard.If you have the right personality, your stock investing will do well.A successful investment career does not require genius-like IQ, extraordinary economic insight, or insider information. All it needs is the correct thinking mode when making investment decisions, and the ability to avoid emotions from disrupting rational thinking. Your Investing performance will depend on the effort and knowledge you put into investing and how stupid the stock market has been during your investing career.The sillier the market is, the better chances are for investors who are good at capturing opportunities.

Based on Buffett's discussion on value investing, we summarize it as the Golden Triangle of Value Investing Success:
1. Cultivate a rational and self-controlled character.

2. Treat market fluctuations correctly.

3. Reasonably evaluate the company's value.

Below we discuss the Golden Triangle of successful value investing in three aspects.

1. How to analyze yourself and cultivate a rational and self-controlled character
Buffett emphasizes that the premise of successful investment is rational thinking and self-control:

Investing has to be rational, and if you can't understand it, don't do it.Buffett's partner Charlie Munger said in a speech at Stanford Law School: "Emotional intelligence is far more important than IQ in investing. You don't have to be a genius to invest, but you do have to have the right personality."

Stock investors only emphasize the mathematical analysis of company financial data, which does not guarantee success, otherwise accountants and mathematicians would be the richest people in the world.But it is also dangerous to be too superstitious about the inspiration of investing in art, otherwise art masters, poets, and qigong masters are all investment masters.

Investors need to be rational when analyzing the company's history; they need to be sensitive and intuitive when predicting the company's future.However, since both historical analysis and future forecasting are made by investors, investors face a lot of incomplete historical information in the process of analyzing and forecasting, and future forecasting information with a small amount and poor accuracy. , every investment decision is to some extent a game with uncertain results.The long-term performance of investors depends on a series of games.Therefore, investors must have a good character like a professional chess player, so as to improve the stability of decision-making.Otherwise, if you gamble wildly like a gambler, a major mistake is enough to be fatal.

2. How to analyze the market
Attitude has a great effect on market fluctuations because the influence of the stock market is too great, and it is very difficult for investors to maintain rational decision-making.

As Buffett said: "An investor must not only have good company analysis skills, but also must isolate his thoughts and behaviors from the highly contagious emotions raging in the market, in order to be successful. In my own efforts to insulate from market sentiment, I have found it very, very useful to keep Graham's Mr. Market story in mind."

The premise of maintaining rationality in the huge psychological impact of market fluctuations is to have a correct attitude and views on market fluctuations.

Investment masters use their lifetime investment experience to provide us with successful experience in correctly viewing market fluctuations: Advice from Graham and Buffett: "Mr. Market" is a servant rather than a guide.

Buffett and Lynch's warning: the stock market can never be accurately predicted.

The basic principle of Buffett and Lynch's investment success: reverse investment instead of following the market.

The common criticism of investment masters on the efficient market theory: the efficient market theory is ridiculous.

3. How to evaluate the value of the company

Investors must first evaluate the value of the company, understand the stock value of the company they are going to buy, and then compare the two based on the market price of the stock to decide whether they want to buy it.After an investor finds a target company that meets his stock selection criteria, buying its stock at will regardless of the stock price does not guarantee him a profit.If the company's stock market price is much lower than its corresponding intrinsic value (more accurately, it should be "true value" or "reasonable value"), it will provide value investors with a large margin of safety and large profit margins.

Investment motto:

Value investors believe that at a certain moment, the value contained in the company should have a certain range, and it will continue to rise and fall as the company's competitiveness rises and falls.Therefore, investors should correctly assess the company’s value and screen out companies with rising competitiveness based on market conditions, judge their current value, and then subtract the margin of safety. If the price is lower than this price, they can make up their minds to buy and finally hold for a long time.

(End of this chapter)