Warren Buffett’s 3 Favorite Books: A guide to The Intelligent Investor, Security Analysis, and The Wealth of Nations by Pysh Preston George

Author:Pysh, Preston George [Pysh, Preston George]
Language: eng
Format: epub
Tags: Business, Finance
ISBN: 9780982967621
Publisher: Pylon Publishing
Published: 2012-05-23T00:00:00+00:00

Andrew’s test scores:

Based on Andrew’s past performance, what do you suppose he might receive in each subject for his 12th-grade year?

Let’s conduct a similar experiment with a different student – Mike.

Mike’s test scores:

Based on Mike’s past performance, what do you suppose he might receive in each subject for his 12th-grade year?

As we look at the two students, whose grades would be easier to predict? If you answered Andrew, I would completely agree. As we look at Mike’s grades, I think we can conclude that his final grades would be difficult to predict because his past performance was volatile.

Taking this same principle and applying it to business, we can draw very similar conclusions. Right now, on the stock market, there are companies like Andrew and companies like Mike. As we look to invest in different businesses, you’ll find a lot of investors are attracted to companies like Mike: companies that are volatile.

Now, that might seem counterintuitive considering a company with volatility is hard to predict. As you think about this concept, you must also understand that most investors lack patience. As a result, they are attracted to a company that could quickly change in value and put money in their pocket.

It is my opinion that the only proven way of making money in the stock market is a value-based approach – one in which an investor looks at a predictable company (with respect to past performance) and assesses its intrinsic value. This investor then compares the intrinsic value to the market price and makes a determination of whether the company is worth investing in. Without being able to predict reasonable performance into the future, calculating this value is impossible. At the end of the valuation portion of this chapter, I’ll provide current examples of companies that have stable and unstable performance. As you become more involved in calculating these values, you’ll quickly realize the importance of picking companies that possess stability.

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