Any intelligent investment should be a value investment. That is the core lesson that any investors should grave deep into their hearts so that they can avoid the risks of permanent loss with their holdings. In 1987, Warren Buffett had discussed his purchase of marketable securities for Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial)'s insurance companies. Those investments can be considered permanent holdings for him.
He said that when Charlie Munger and he bought common stock, they approached the transactions as if they were buying into a private business. They looked at the economic prospects of the business, the people in charge of running it, and the price they had to pay. Both of them were willing to hold a stock indefinitely as long as the business could increase in intrinsic value at a satisfactory rate. Buffett saw himself and Charlie as business analysts, not market analysts or macroeconomic analyst, or even security analysts. He commented: “Our approach makes an active trading market useful, since it periodically presents us with mouth-watering opportunities. But by no means is it essentials; a prolonged suspension of trading in the securities we hold would not bother us any more than does the lack of daily quotations on World Book or Fechheimer. Eventually, our economic fate will be determined by the economic fate of the business we own, whether our ownership is partial or total.”
Benjamin Graham, the father of value investing philosophy, had great insights into a guy named Mr. Market. This guy had incurable emotional problems. Some times he feels euphoric and can see only favorable factors affecting the business. It is when he would quote the very high price because he is afraid that others can come and rob his gains away. Other times he would feel very depressed and can see only trouble ahead, then he would quote very low price for businesses. Buffett added: “Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.”
So Mr. Market is there to serve you, not to guide you. He is always there, with his very wide mood swing. Investors are free to either ignore him or take advantage of him, but it would be very dangerous to fall under his influence.
According to Warren Buffett, investment success would not be produced by any fixed formulae, computer programs or price movement signals. Rather, the success comes from coupling good business judgment with an ability to insulate the thoughts and behavior from super-contagious emotions that swirl about the marketplace. So Warren Buffett and Charlie Munger let their marketable equities tell them by the operating results, not by daily, or even yearly, price quotations to determine whether the investments are successful or not.
On selling out the investments, Buffett said: “Sometimes, of course, the market may judge a business to be more valuable than the underlying facts would indicate it is. In such a case, we will sell our holdings. Sometimes, also, we will sell a security that is fairly valued or even undervalued because we require funds for a still more undervalued investment or one we believe we understand better. We need to emphasize, however, that we do not sell holdings just because they have appreciated or because we have held them for a long time (Of Wall Street maxims the most foolish may be “you can’t go broke taking a profit”). Buffett is confident to hold any security indefinitely if there are three main important things: satisfactory return on equity capital, competent management and the business is not overvalued by the market.
Churchill once said, “You shape your houses and then they shape you.” And both Buffett and Munger know what way they wish to be shaped. Buffett stated that he would rather achieve return of X while associating with people whom he admires a lot than realize 110% of X by exchanging these relationships for unpleasant ones. Buffett didn’t see the much difference between buying into the control of the business and the purchase of marketable securities. In any case, he preferred to buy into businesses with favorable long-term economics. He said, “Our goal is to find an outstanding business at a sensible price, not a mediocre business at bargain price. Charlie and I have found that making silk purses out of silk is the best that we can do; with sow’s ears, we fail.”
He said that when Charlie Munger and he bought common stock, they approached the transactions as if they were buying into a private business. They looked at the economic prospects of the business, the people in charge of running it, and the price they had to pay. Both of them were willing to hold a stock indefinitely as long as the business could increase in intrinsic value at a satisfactory rate. Buffett saw himself and Charlie as business analysts, not market analysts or macroeconomic analyst, or even security analysts. He commented: “Our approach makes an active trading market useful, since it periodically presents us with mouth-watering opportunities. But by no means is it essentials; a prolonged suspension of trading in the securities we hold would not bother us any more than does the lack of daily quotations on World Book or Fechheimer. Eventually, our economic fate will be determined by the economic fate of the business we own, whether our ownership is partial or total.”
Benjamin Graham, the father of value investing philosophy, had great insights into a guy named Mr. Market. This guy had incurable emotional problems. Some times he feels euphoric and can see only favorable factors affecting the business. It is when he would quote the very high price because he is afraid that others can come and rob his gains away. Other times he would feel very depressed and can see only trouble ahead, then he would quote very low price for businesses. Buffett added: “Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.”
So Mr. Market is there to serve you, not to guide you. He is always there, with his very wide mood swing. Investors are free to either ignore him or take advantage of him, but it would be very dangerous to fall under his influence.
According to Warren Buffett, investment success would not be produced by any fixed formulae, computer programs or price movement signals. Rather, the success comes from coupling good business judgment with an ability to insulate the thoughts and behavior from super-contagious emotions that swirl about the marketplace. So Warren Buffett and Charlie Munger let their marketable equities tell them by the operating results, not by daily, or even yearly, price quotations to determine whether the investments are successful or not.
On selling out the investments, Buffett said: “Sometimes, of course, the market may judge a business to be more valuable than the underlying facts would indicate it is. In such a case, we will sell our holdings. Sometimes, also, we will sell a security that is fairly valued or even undervalued because we require funds for a still more undervalued investment or one we believe we understand better. We need to emphasize, however, that we do not sell holdings just because they have appreciated or because we have held them for a long time (Of Wall Street maxims the most foolish may be “you can’t go broke taking a profit”). Buffett is confident to hold any security indefinitely if there are three main important things: satisfactory return on equity capital, competent management and the business is not overvalued by the market.
Churchill once said, “You shape your houses and then they shape you.” And both Buffett and Munger know what way they wish to be shaped. Buffett stated that he would rather achieve return of X while associating with people whom he admires a lot than realize 110% of X by exchanging these relationships for unpleasant ones. Buffett didn’t see the much difference between buying into the control of the business and the purchase of marketable securities. In any case, he preferred to buy into businesses with favorable long-term economics. He said, “Our goal is to find an outstanding business at a sensible price, not a mediocre business at bargain price. Charlie and I have found that making silk purses out of silk is the best that we can do; with sow’s ears, we fail.”
