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To invest successfully, you
need not understand beta, efficient markets, modern portfolio theory,
option pricing or emerging markets. You may, in fact, be better off
knowing nothing of these. That, of course, is not the prevailing
view at most business schools, whose finance curriculum tends to be
dominated by such subjects. In our view, though, investment
students need only two well-taught courses - How to Value a Business,
and How to Think About Market Prices.
Your goal as an investor should simply be to purchase, at a rational
price, a part interest in an easily-understandable business whose
earnings are virtually certain to be materially higher five, ten and
twenty years from now. Over time, you will find only a few
companies that meet these standards - so when you see one that
qualifies, you should buy a meaningful amount of stock. You must
also resist the temptation to stray from your guidelines: If you
aren't willing to own a stock for ten years, don't even think about
owning it for ten minutes. Put together a portfolio of companies whose
aggregate earnings march upward over the years, and so also will the
portfolio's market value.
» Warren
Buffett, 1996 Letter To Berkshire Shareholders
Confronted with a challenge to distill the secret of sound investment
into three words, we venture the motto, Margin of Safety.
» Benjamin
Graham, The Intelligent Investor (1949)
The key to investing is not assessing how much an industry is going to
affect society, or how much it will grow, but rather determining the
competitive advantage of any given company and, above all, the
durability of that advantage. The products or services that have wide,
sustainable moats around them are the ones that deliver rewards to
investors.
» Warren
Buffett, Fortune Magazine Nov. 1999
We will continue to ignore political and economic forecasts, which are
an expensive distraction for many investors and businessmen.
Thirty years ago, no one could have foreseen the huge expansion of the
Vietnam War, wage and price controls, two oil shocks, the resignation
of a president, the dissolution of the Soviet Union, a one-day drop in
the Dow of 508 points, or treasury bill yields fluctuating between 2.8%
and 17.4%.
But, surprise - none of these blockbuster events made the slightest
dent in Ben Graham's investment principles. Nor did they render
unsound the negotiated purchases of fine businesses at sensible
prices. Imagine the cost to us, then, if we had let a fear of
unknowns cause us to defer or alter the deployment of capital.
Indeed, we have usually made our best purchases when apprehensions
about some macro event were at a peak. Fear is the foe of the
faddist, but the friend of the fundamentalist.
» Warren
Buffett, 1994 Letter To Berkshire Shareholders
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