Learn to invest with Buffett

Chapter 43

Chapter 6, Section 7, Stock Picking Skill Seven: "Continuity" is the key to unlocking the treasury

We like to buy businesses, we don't like to sell them, we want to stay with them for life.

--Warren Buffett
Not all stocks bought should be held for a long time, and stocks with sustainable profitability are worth holding for a long time.Buffett's only criterion for judging whether to hold or sell is that the company has sustained profitability, not its price rise or fall.

He has bought dozens of stocks, most of which have been held for several years, and some stocks have been held for a short period of time, but only a few such as Coca-Cola, GKI-CO, "Washington Post", Gillette, etc. Stocks have been held for more than 10 or even 20 years since they were purchased.

Buffett once said: "Investing in stocks is very simple. All you need to do is buy the stock of a large business at a price below its intrinsic value, and at the same time believe that this business has the most honest and capable management. Then, You can hold these stocks forever."

Since whether to hold stocks for a long time is determined by sustainable profitability, what are the main indicators to measure the company's sustainable profitability?

Buffett believes that the best indicator is transparent profitability.Transparent Earnings is made up of Reported Operating Profit, plus retained earnings from major investee companies (which is not reflected in corporate earnings under GAAP), and then deducting what would have been paid if those retained earnings had been distributed to us. tax.

To calculate transparent earnings, investors should determine the corresponding distributable returns for each stock in the portfolio and then add them up.Every investor's goal should be to build a portfolio (similar to an investment firm) that will give him the highest projected transparent profit a decade or so from now.Such an approach will force investors to think about the real long-term prospects of the company rather than the short-term stock price performance. This long-term thinking angle will help improve their investment performance.Of course, it is undeniable that in the long run, the scoreboard of investment decisions is still the stock market value.But the share price will depend on the company's future profitability.Investing is like playing baseball. If you want to score, you must focus on the field instead of staring at the scoreboard.If the short-term temporary change in the profitability of the enterprise does not affect its long-term profitability, investors should continue to hold it for a long time.But if there is a fundamental change in the company's long-term profitability, investors should have no hesitation in selling.

Aside from corporate profitability, other factors such as macroeconomics, interest rates, analyst ratings, etc., are irrelevant.

Some people may ask, how can we discover the profitability of stocks?Buffett believes that if the holding time is long enough, the company's value will be reflected in the stock price.Through the research, it is found that the longer the holding time, the higher the correlation with the company's value discovery:

1.当股票持有3年，其相关性区间为0.131～0.360（相关性0.360表示股票价格的变动有36%是受公司盈余变动的影响）；

2. When the stock is held for 5 years, the correlation range moves up to 0.574-0.599;

3. When the stock is held for 10 years, the correlation range rises to 0.593-0.695.

These numbers reflect a fairly meaningful positive correlation, and the results also largely support Buffett's view that a company's stock price, when held for a sufficiently long period of time, must reflect the company's fundamentals. situation.But Buffett also pointed out that the mutual influence process of a company's profit and stock price performance is usually not very balanced, nor can it be fully expected.In other words, although profits and stock prices will have a strong correlation over a period of time, it is difficult to accurately grasp when the stock price reflects the fundamentals.Buffett said: "Even if the market price reflects the value of the enterprise at any time for a period of time, it is still possible to have large fluctuations in any one of those years."

Investment motto:

What investors need to pay attention to is that as long as the future of China's economy and stock market is optimistic, they should stick to long-term investment strategies.As a medium and long-term investment and financial management method, what investors really need to pay attention to is the long-term growth trend of stocks and the stability of performance performance, and the operation method corresponding to this characteristic is long-term holding.A company with excellent performance can maintain long-term and stable profitability in various market environments. Good performance is an important criterion for judging the quality of a company.

(End of this chapter)