Fundamentals of Investing

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  1. The best businesses are those that have a competitive advantage and can generate healthy profits over time.
  2. In conclusion, this book is not for everyone, but it certainly provides great insights in how to cut the noise, focus in value, do your homework before you invest and ultimately, build an investing strategy where you can sleep at night.

In the essays of Warren Buffet: Lessons of Corporate America, Warren Buffett shares his thoughts in investing. It taught me more about investing than any school ever did.

Warren Buffett

A horse that can count to ten is a remarkable horse — not a remarkable mathematician. Calling someone who trades actively in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic.” The Essays of Warren Buffett by Warren Buffett

The financial market has moved somewhat away from this philosophy over the past twenty years to focus mainly on growth. This is something that Warren Buffett deeply regrets.

In this book, Warren Buffet offers his insights on topics such as the role of a CEO, the importance of having a clear vision for a company, and the need to always be learning. He also provides his thoughts on what makes a good investment, and how to think about risk.

Top insights:

1- Fundamentals of investing

  • Understand your limitations
  • Focus on future cash flows
  • Avoid participating in asset price speculation
  • Think on what companies produce not daily valuations (you prefer to have a good night sleep instead of having your face plastered to the screen)
  • Best to avoid macro opinions (following news broadcast causes anxiety, or worst, influence in your already made decision about a stock)

2- Invest in quality

If the choice is between a questionable business at a comfortable price or a comfortable business at a questionable price, we much prefer the latter.

Over the long-run, a business return on capital will equal your return on investment. Better to invest in an overvalued company, rather than in a lower quality business.

The value-investing philosophy advances that you absolutely must thoroughly evaluate a company before investing your money on it. Take the time to study the fundamentals of the company and understand its product and competitive advantage.

3- Resilience towards Mr. Market

The mental attitude toward market volatility, or as Ben Graham (Warren Buffet's friend and teacher) described in his book 'The Intelligent Investor', Mr. Market, will appear daily with a price to buy your interest or sell you his.

Remember, Mr. Market is here as a service, not as guidance.

4- Deep value investing

The best businesses are those that have a competitive advantage and can generate healthy profits over time.

Buying businesses at 'bargain prices', will not turn out to be such a win after all. Any initial advantage will be soon vanished by the low return in capital the business earns.

5- Keep inflation in mind

How will those businesses you are investing in, will be impacted by inflation? Those who need to buy machinery or net tangible assets will be harmed by inflation enormously.

Asset-heavy businesses generally earn low capital returns, hence will need to incur towards share buybacks or others forms of capital injection to survive.

On the other hand, telecom businesses for example, follow the Metcalfe's law. The Metcalfe’s Law explains how the value of networks grows exponentially … exploring the “network effects” of businesses like Apple, Facebook, Trulia and Uber. As fixed costs remain the same, but number of users increase over time.

6- Understand Risk

Does the investment after taxes, provide enough purchasing power plus a modest interest rate, as when the investor started with? You can diversify or follow price volatility, but better if calculated in a higher level of accuracy, by these main factors:

  • Can management be evaluated?
  • The buying price
  • The levels of taxation and inflation
  • Is management reaping the rewards to shareholders rather than themselves?
  • Does the business long-term economic characteristics be evaluated?

7- A business without moat will not survive

Moat is never stagnant, either it grows or it decreases.

'Widening the moat', as referred in the book, is when long-term competitive position improves: this can be considered as the company offering excellent customer service, improving product and eliminating unnecessary costs.

If management decides to risk long-term over short-term gains, it is even more essential to widen the moat, and focus on the long-run sustainable growth and strength of the company.

There are so many investment advices from Warren Buffett, that have resonated with me and became my bible in investing.

Certainly, my favourite is, to Invest in Yourself. You must spend your life trying to learn new things and deepen your knowledge, whether through reading or training.

In conclusion, this book is not for everyone, but it certainly provides great insights in how to cut the noise, focus in value, do your homework before you invest and ultimately, build an investing strategy where you can sleep at night.

Finalising with one of my favourite quotes:

“Close the doors. Be fearful when others are greedy. Be greedy when others are fearful”
Warren Buffett, The Essays of Warren Buffett: Lessons for Corporate America

Risk disclaimer: Investment involves risk of loss.