takeover talk, page-7

Buffet attempts to figure out what an investment is worth. He does his best to determine its value and attempts to buy it cheap. Most people confuse price with value. We think if the share price is $10, then the share must be worth $10. Buffett does not look at the price. He calculates the value, which he basically determines by the earnings of an investment, and then he figures out the best price to pay for it. Then, he patiently waits for the market to offer him a much attractive price for his holdings. Sometimes this can take many years. Buffett strongly suggests that one should not be a stock trader if one has no interest in studying accounting and valuing a business, and does not understand market prices.

Most people, according to Buffett, would be better off just buying a low cost, low-tax, index fund, and dollar-cost averaging into it over their working life to enjoy reasonable returns. Buffett’s investing style is based on the methods that have been extolled by his former college professor, Benjamin Graham. Many of these methods were documented in a book by Graham called The Intelligent Investor.

A share represents a share of a business. Buffet says if we think about it like that, we will have an owner-mentality, rather than a trader- mentality. Then, we will think more about the value of the business, and not the price of it. We have to think that in the share market, we have a virtual partner, whom Benjamin Graham called Mr Market. Every time the share market opens, Mr Market is either manic or depressed. When he is manic, he wants you to buy his share of the business for twice as much as what you think the business is worth, so you should sell.

When Mr Market is depressed, Graham postulated that he wants to sell you his share of the business for half of what it worth, so you should buy instead. What most people do wrong is they treat Mr Market as their master and follow his mood. But Buffett, like Graham uses Mr Market as his servant, and does the opposite of what Mr Market wants.

Buffet talks about a margin of safety, which is the difference between his estimated value and the price of an investment. The lower the price of a share from his valuation, the more margin of safety Buffet feels he has. Therefore, Buffett likes declining markets because he can get more margin of safety from such markets. Buffet is feeling increasingly confident about the opportunity in the share market. This is in stark contrast to most investors today.

In bull markets, however, Buffett will wait patiently on the sidelines. The share market is a place where emotions run high as shares are being auctioned off to the highest bidder. Emotions come into play all the time because people want to win. So they either push up or push down the prices of shares. Many of us confuse price with value, and as a result don’t always make the best investment decision. There is much we could learn from Warren Buffet.