Summary: How to Pick Stocks Like Warren Buffett by BusinessNews Publishing

Author:BusinessNews Publishing
Language: eng
Format: epub
Publisher: BusinessNews Publishing
Published: 2016-09-22T00:00:00+00:00

5. Don’t factor in an indefinitely favorable future.

In an extended bull market, most investors tend to get caught up in a momentum paradigm – they expect prices to move steadily upwards indefinitely. Warren Buffet cautions against that kind of logic, and suggests long-term, a company simply cannot be worth more than what investors will ultimately take out of it in earnings.

For that reason, Warren Buffett insists on injecting a lot of common sense into his investment approach. He freely admits he cannot accurately pinpoint the exact future value of a company because of all the usual external factors.

“This concept of an indefinitely favorable future is dangerous, even if it is true; because even if it is true you can easily overvalue the security, since you can make it worth anything you want it to be worth. Beyond this, it is particularly dangerous too, because sometimes your idea of the future turns out to be wrong. Then you have paid an awful lot for a future that isn’t there. Your position then is pretty bad.”

– Benjamin Graham

“Humans are not hard wired to rationally weigh risk and reward. We are still better suited to run when we see a saber-toothed tiger than to consider potential returns of intangible assets.”

– Warren Buffett

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