Chapter 45

Chapter 7 Section 2 When a good company goes wrong it is a good opportunity to buy

Great investment opportunities arise when great companies get caught up in unusual circumstances, which can cause their shares to be falsely undervalued.When they need surgery, we buy.

--Warren Buffett
To the surprise of some who study Buffett's investing behavior: Buffett sometimes buys a business whose prospects seem bleak. In the late 1960s, he bought a stake in American Express after the salad oil scandal, bought GEICO in the 20s, and Wells Fargo in the early 70s.

Why did Buffett do this?He kept in mind what Graham said, most of the market is full of short-term investors, and they are for the immediate benefit.This means that if a company is in operating difficulties, then in the market, the company's stock price will fall.This is a good time for investors to enter the market and make long-term investments.

Buffett likes to invest in a good company when its stock price is temporarily frustrated due to doubts or misunderstandings.Although one cannot predict stock market fluctuations, almost anyone who has a little knowledge of the history of the stock market knows that, generally speaking, there are particular times when it is obvious whether the stock price is too high or too low up.The trick is that there are very few stocks that are worth less than their intrinsic value to buy when the stock market is in overdrive.During an overly depressed stock market, there are so many stocks that can be purchased for less than their intrinsic value that investors with limited financial resources are unable to take full advantage of the opportunity.The market crash is the best time to buy stocks at low prices with a large margin of safety.

Buffett can think carefully and distinguish what is true and what is only superficially true. He applies this special judgment to the stock market, buying stocks of good companies that are not popular.

At Wesker's annual meeting in 1997, Munger said: "The greatness of a good business lies in its ability to withstand some setback or loss... If it cannot withstand that test, it will fail. Not a treasure worth digging for."

When Buffett first invested in American Express, the high-quality company was being engulfed in scandal.When Buffett invested in Wells Fargo, the bank's real-estate lending business nearly brought down the entire company.When Buffett invested in GEICO, the company suffered major losses and faced bankruptcy.

American Express is definitely a company that fits the trend of the times.When "Time Magazine" announced that the "cashless society" has arrived, a circulation revolution in which credit cards replace cash is about to begin, and American Express is the navigation light of this revolution.By 1963, 1000 million members of the public held Amex cards, and the company's tens of thousands of dollars of notes were in circulation, accepted without hesitation like currency.However, the company later ran into big trouble.

In a very ordinary day-to-day transaction, an American Express warehouse in Bayonne, New Jersey, received a shipment of what was said to be salad oil in a can from the then-large Consolidated Crude Refining Company, which the warehouse gave to Consolidated A receipt was issued as a certificate for this batch of so-called salad oil, and the United Company used this receipt as collateral to obtain the loan.

Consolidated later declared bankruptcy. In November 1963, American Express discovered that the tank contained only a small amount of salad oil, mostly seawater.Amex's warehouses suffered a huge deception, with losses estimated at $11 million.

Howard Clark, president of American Express, decided to assume the debt, which means that the parent company will face various claims, including claims without legal basis, and the potential losses are huge.In effect, he said, the company was effectively "insolvent."

Buffett's conclusion after market research was quite different from the common opinion of the public at that time: American Express has not gone downhill, and the American Express trademark is still one of the most popular symbols in the world.

Buffett recognized the franchise value of the American Express name.A franchise means the power to monopolize a market.Nationwide, it has an 80 percent share of the travelers check market and also has a major stake in premium cards.Buffett believes that nothing has shaken Amex's market dominance, and nothing can shake it.

And the stock market values ​​the company's stock on the basis that its customers have abandoned it.Wall Street brokerages swarmed and sold off like crazy. On November 1963, 11, the company's stock fell from $22 per share before the news came out to $60 per share. By early 56.5, the stock price fell to $1964 per share.

Therefore, Buffett decided to buy a large amount of shares in American Express. In 1964, he bought 40% of the assets of Buffett Partnership and about 1300 million US dollars to buy 5% of the shares of American Express.

在接下来两年的时间里美国运通的股价上涨了3倍。在5年的时间内股价上涨了5倍,从每股35美元上涨到189美元。他投资美国运通的收益率最起码在4倍以上。

Therefore, a good time to buy stocks often occurs when a company with a sustainable competitive advantage has a temporary major problem, and at this time the purchase has a sufficient margin of safety.Because while these problems are serious, they are temporary in nature and have no fundamental impact on the company's long-term competitive advantage and profitability.If the market panics after a company has a problem, a large number of stocks are sold and the stock price falls sharply, causing the company's stock to be seriously undervalued. At this time, it will bring sufficient margin of safety and huge profit opportunities to value investors.As companies return to normal operations after their problems are resolved, and the market re-accepts that their long-term profitability is intact, stock prices will recover sharply.The company's stable and sustainable competitive advantage and long-term profitability are the fundamental reasons for ensuring the safety and profitability of investment capital.

Investment motto:

As a general investor, if it has been proved that a certain company has the characteristics of good operation or exclusive consumption, or even both, it can be expected that the company will be able to survive the economic downturn. Its operating performance must be better than in the past.The economic downturn is the most difficult test for those companies with weak operating constitutions. However, for well-run companies, once the situation improves in this knockout match, they will show the momentum of the strong and expand their existing strengths. market share.

(End of this chapter)

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