An understanding of the investing lessons of Warren Buffett.
1. Value investing works. Buy bargains which involve buying assets at a price below the asset’s intrinsic value. Value investing takes time, focus, discipline and patient, and is a hard process to implement and follow. It requires a lot of work to determine the fair value of a particular business. If investors could predict the future directions of the stock market, they would certainly not choose to be value investors. But no one can accurately forecast future prices. Value investing is a safe and successful strategy in all investing environments. The biggest obstacle for a value investor is to remain disciplined and patient in every circumstance the market and life might throw at him. Most people quit value investing and long- term investing for this exact reason: because they lack the discipline and cannot sit through periods of poor performance.
2. Quality matters, in businesses and in people. Better quality businesses are more likely to grow and compound cash flow; low quality businesses often erode and even superior managers, who are difficult to identify, attract, and retain, may not be enough to save them. Always partner with highly capable managers whose interests are aligned with yours.
3. There is no need to overly diversify. Invest like you have a single, lifetime “punch card” with only 20 punches, so make each one count. Look broadly for opportunity, which can be found globally and in unexpected industries and structures.
4. Consistency, discipline and patience are crucial. Most investors are their own worst enemies. Endurance and long-term perspective enables compounding.
5. Risk is not the same as volatility; risk results from overpaying or overestimating a company’s prospects. Prices fluctuate more than value; price volatility can drive opportunity. Sacrifice some upside as necessary to protect on the downside.
6. Unprecedented events (or Black Swan events) occur with some regularity, so be prepared.
7. You can make some investment mistakes and still thrive.
8. Holding cash in the absence of opportunity makes sense.
9. Favor substance over form. It doesn’t matter if an investment is public or private, fractional or full ownership, or in debt, preferred shares, or common equity.
10. Candor is essential. It’s important to acknowledge mistakes, act decisively, and learn from them. Good writing clarifies your own thinking and that of your fellow shareholders.
11. To the extent possible, find and retain like-minded shareholders (and for investment managers, investors) to liberate yourself from short-term performance pressures.
12. Do what you love, and you’ll never work a day in your life.
13. “The first rule of investing is to not lose money, the second rule is to never forget the first one,” states Warren Buffett. Loss avoidance must be the cornerstone of your investment philosophy. Investors should not stick to bonds or avoid risks at all, but rather that “an investment portfolio should not be exposed to losses of principal capital over five to ten years”, according to Klarman. This, concentrating on avoiding big losses is the safest way to ensure a profitable investing outcome.
14. Ignore Market Price Fluctuations which are completely unrelated to the value of the investment or asset. When the stock’s market price goes down, the investment may be seen as riskier regardless of its fundamentals. But that’s not risk. Investors should expect prices to fluctuate and should not invest in securities if they cannot tolerate market volatility.
“A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable and rapidly changing world.” ~ Seth Klarman
Berkshire Hathaway CEO and Chairman, Warren Buffett, is known for his value investing approach, which involves finding companies that are undervalued by the market and investing in them for the long term. To invest like Warren Buffett, there are a few things you need to know.
First, you need to have a clear understanding of what value investing is and how it works.
Second, you need to be patient and be willing to hold onto your investments for the long term.
Third, you need to have the discipline to stick to your investing strategy even when the market is going against you.
When deciding on how to invest in a company, the first step is to determine its worth or intrinsic value. According to Warren Buffett, the best companies to buy are those that are inexpensive to buy. His investment strategy is based on a few simple principles:
Buy quality companies that have a competitive advantage (moat),
Buy them at a reasonable price with a margin of safety, and
Hold them for the long term.
These principles of margin of safety have helped Buffett generate incredible returns over his career. Margin of safety is a strategy that involves investing only in securities at a significantly lower intrinsic value than their market price.
The margin of safety (MOS) allows investors to avoid overpaying for an investment or asset, and it protects investors from the potential of loss if the market price of the asset falls. Buffett has said that the margin of safety is the key to his investing success.
The margin of safety is a measure of how much room there is between the price of the stock and its inherent value. The wider your margin of safety, the less likely it is that overly optimistic valuation inputs will harm your investment.
Value investing is the process of making investment decisions using margin of safety. It is critical for value investors to find a high-quality, easy-to-understand company with good management priced below its intrinsic value.
The purpose of using a margin of safety in buying is twofold.
If your investment does not grow as quickly as you originally anticipated, you may be forced to make more conservative investments in your portfolio. If your estimates are correct, you will be able to achieve a better rate of return over time due.
If you purchased the investment at an extremely low price.
Discounted cash flow (DCF) is a method of valuing a company or asset using the principles of time value of money.
The objective of DCF is to find the value of an investment today, given its expected cash flows in the future. One popular way to value a company is using the discounted cash flow (DCF) method. This approach discounts a company’s future expected cash flows back to the present day, using a required rate of return or “hurdle rate” as the discount rate. The idea is that a company is worth the sum of all its future cash flows, discounted back to the present.
The DCF formula is: Value of Investment = Sum of (Cash Flow in Year / (1 + Discount Rate)^Year)
The “discount rate” is the required rate of return that an investor demands for investing in a company. This rate is also known as the “hurdle rate.” There are two ways to calculate the discount rate.
There are two ways to calculate the discount rate.
The first is the weighted average cost of capital (WACC). This approach considers the cost of all the different types of capital that a company has, including debt and equity.
The second way to calculate the discount rate is the discount rate for equity. This approach only considers the cost of equity, which is the return that investors demand for investing in a company.
Once the discount rate is determined, the next step is to estimate the cash flows that a company is expected to generate in the future. These cash flows can come from a variety of sources, including operating income, investments, and financing activities. After the cash flows have been estimated, they need to be discounted back to the present using the discount rate.
The present value of the cash flows is then the sum of all the future cash flows, discounted back to the present.
“If you understood a business perfectly and the future of the business, you would need very little in the way of a margin of safety. So, the more vulnerable the business is, assuming you still want to invest in it, the larger margin of safety you’d need. If you’re driving a truck across a bridge that says it holds 10,000 pounds and you’ve got a 9,800 pound vehicle, if the bridge is 6 inches above the crevice it covers, you may feel okay, but if it’s over the Grand Canyon, you may want a little larger margin of safety.” ~ Warren Buffett
“Don’t look at a stock like it is a ticker symbol with a price that goes up and down on a chart. It’s a slice of a company’s profits far into the future, and that’s how they need to be evaluated.” ~ Warren Buffett, Chairman and CEO, Berkshire Hathaway
Warren Buffett’s philosophy is simple. Buy with a “margin of safety” undervalued companies with strong fundamentals and balance sheet, and then wait. It’s possibly the most boring way to invest in the world. But it’s effective.
In his Berkshire Hathaway 1977 annual letter to shareholders, he listed four attributes he wanted to see when investing, whether he’s buying the entire company for Berkshire, or just a slice of it as a stock.
1. “One that we can understand…”
When Buffett talks about “understanding” a company, he means he understands how that company will be able to make money far into the future.
He’s often said he didn’t buy shares of what turned out to be very successful tech companies like Google and Microsoft because he didn’t understand them. At the 2000 annual meeting, a skeptical shareholder told Buffett he couldn’t imagine him not understanding something. Buffett responded, “Oh, we understand the product. We understand what it does for people. We just don’t know the economics of it 10 years from now.”
2. “With favorable long-term prospects …”
Buffett often refers to a company’s sustainable competitive advantage, something he calls a “moat.”
“Every business that we look at we think of as an economic castle… And you want the capitalistic system to work in a way that millions of people are out there with capital thinking about ways to take your castle away from you, and appropriate it for their own use. And then the question is, what kind of a moat do you have around that castle that protects it?”
— 2000 BERKSHIRE ANNUAL MEETING
A “moat” consists of things a company does to keep and gain loyal customers, such as low prices, quality products, proprietary technology, and, often, a well- known brand built through years of advertising, such as Coca-Cola. An established company in an industry that has large start-up costs that deter would be competitors can also have a moat.
3. “Operated by honest and competent people …”
“Generally, we like people who are candid. We can usually tell when somebody’s dancing around something, or where their — when the reports are essentially a little dishonest, or biased, or something.
And it’s just a lot easier to operate with people that are candid.
“And we like people who are smart, you know.
I don’t mean geniuses… And we like people who are focused on the business.” — 1995 BERKSHIRE ANNUAL MEETING
The quality of the business itself, however, takes precedence.
“The really great business is one that doesn’t require good management. I mean, that is a terrific business. And the poor business is one that can only succeed, or even survive, with great management.” — 1996 BERKSHIRE ANNUAL MEETING
4. “Available at a very attractive price.”
“The key to [Benjamin] Graham’s approach to investing is not thinking of stocks as stocks or part of a stock market. Stocks are part of a business. People in this room (Berkshire shareholders) own a piece of a business. If the business does well, they’re going to do all right as long as they don’t pay way too much to join into that business. — 1997 BERKSHIRE ANNUAL MEETING
Buffett’s goal is to buy with a “margin of safety” or when the market price is below a company’s “intrinsic value.” Buffett has said that the margin of safety is the “most important concept in investing.”
“The three most important words in investing are margin of safety…” ~ Warren Buffett
“The intrinsic value of any business, if you could foresee the future perfectly, is the present value of all cash that will be ever distributed for that business between now and judgment day.
“And we’re not perfect at estimating that, obviously.
“But that’s what an investment or a business is all about. You put money in, and you take money out.
“Aesop said, ‘A bird in the hand is worth two in the bush.’ Now, he said that around 600 B.C. or something like that, but that hasn’t been improved on very much by the business professors now.” — 2014 BERKSHIRE ANNUAL MEETING
“Every investment is the present value of all future free cash flow.” Everything Money
Cash flow refers to the net amount of cash and cash equivalents that comes in and goes out of a company. Businesses take in money from sales as revenues and spend money on expenses. Cash received represents inflows, while money spent represents outflows.
“Intrinsic value can be defined simply as the discounted value of cash that can be taken out of a business during its remaining lifetime. “ ~ Warren Buffett
A company’s ability to create value for shareholders is fundamentally determined by its ability to generate positive cash flows or, more specifically, to maximize long-term free cash flow (FCF). FCF represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.
Intrinsic value is defined as the discounted present value of all future cash flow of a business.
The only reason to lay out money for an investment now is to get more money later. When you invest in a bond, its very easy to see the future cash flow and the terminal value of a bond, its printed on the certificate.
When you invest in a stock,
Investing in any financial asset involves laying out cash now in order to get cash later out of the investment. And investing in a business, can the business deliver enough cash to you (the owner) soon enough that it makes sense to buy it as its current market value?
How much am I willing to pay for a business, considering it makes $24B in cash flow per year, and is growing at 10% annually.
Once we determine the business intrinsic value, we compare that number to the business’ current market capitalization. Market cap is the product of the total shares outstanding and the current market stock price.
Market cap is higher than intrinsic value = overvalued
Market cap is lower than intrinsic value = undervalued
Discounted Free Cash Flow since one dollar today is worth more thant $1 in five years due to opportunity costs and lost of purchasing power of that dollar.
Step 1: Find the current free cash flow – Free cash flow is the amount of money left over for the owners of the business, after factoring in cash outflows that support its operations and maintain its capital assets. The ideal FCF for valuation would equal Operating Cash Flow minu Maintenance CapEx
Step 2: Grow the current free cash flow out 10 years in the future – the growth rate used will have a big impact on the final intrinsic value calculation. Check historical growth rate for cash flow and industry growth rate for cash flow. Or, look at trend and future capital investments.
Step 3: Add a terminal value – what you can sell the business for in 10 years. Use FCF multiple.
Step 4: Discount all future cash flows to present value at a rate of 12% to 15%
Step 5: Add together all future cash flows to find intrinsic value
Step 6: Add a margin of safety (of 20% to 30%)
In the current market environment, most companies will be trading above the intrinsic value.
“Compounding doesn’t rely on earning big returns. Merely good returns sustained uninterrupted for the longest period of time—especially in times of chaos and havoc—will always win.” ― Morgan Housel, The Psychology of Money: Timeless lessons on wealth, greed, and happiness
More than 2,000 books are dedicated to how Warren Buffett built his fortune. Many of them are wonderful. But few pay enough attention to the simplest fact:
Buffett’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child, writes Morgan Housel in his seminal book, The Psychology of Money: Timeless lessons on wealth, greed, and happiness.
Warren Buffett’s estimated net worth is $110 billion as of November 2022. Of that, $109.2 billion was accumulated after his 50th birthday. $107.5 billion came after he qualified for Social Security, in his mid-60s. Warren Buffett is a phenomenal investor.
But you miss a key point if you attach all of his success to investing acumen. The real key to his success is that he’s been a phenomenal investor for three quarters of a century.
Had he started investing in his 30s and retired in his 60s, few people would have ever heard of him. Consider a little thought experiment. Buffett began serious investing when he was 10 years old. By the time he was 30 he had a net worth of $1 million, or $9.3 million adjusted for inflation.16
What if he was a more normal person, spending his teens and 20s exploring the world and finding his passion, and by age 30 his net worth was, say, $25,000? And let’s say he still went on to earn the extraordinary annual investment returns he’s been able to generate (22% annually), but quit investing and retired at age 60 to play golf and spend time with his grandkids. What would a rough estimate of his net worth be today? Not $110 billion. $11.9 million. 99.9% less than his actual net worth.
Effectively all of Warren Buffett’s financial success can be tied to the financial base he built in his pubescent years and the longevity he maintained in his geriatric years. If you had invested $10,000 with Warren Buffett in 1966, today you would have over $160 million! That same $10,000 invested in the S&P would be $140,000.
Buffett’s skill is investing, but his secret is time. That’s how compounding works. Think of this another way. Buffett is considered by many to be the most famous and successful investor in history. But he’s not necessarily the greatest—at least not when measured by average annual returns.
“Doing well with money isn’t necessarily about what you know. It’s about how you behave. And behavior is hard to teach, even to really smart people.” ~ Morgan Housel
References:
Morgan Housel, The Psychology of Money: Timeless lessons on wealth, greed, and happiness., Harriman House, September 8, 2020.
A focus on finding small cap companies with great fundamentals and big growth prospects.
A small-cap stock is a stock of a publicly-traded company whose market capitalization ranges from $300 million to approximately $2 billion, explains Corporate Finance Institute. The word “cap” in this term refers to a company’s market capitalization.
Savvy investors cannot afford to overlook small-cap growth companies. Although, there are several pros and cons of investing in small-cap stocks that must be considered.
Small-cap companies, in general, tend not to get the same kind of publicity as their large-cap siblings. They aren’t going to lead a segment on CNBC or the home page of the Wall Street Journal on a daily basis.
With smaller market capitalizations, small-cap companies tend to fly under the radar.
The Rise of Small-Cap Stocks
Reasons that people may invest in small-cap companies are capital appreciation — they think the stock price will go up and dividends — where the company pays you to hold it.
But some of these are solid companies and excellent small-cap stocks to buy.
Small-cap equities are more sensitive to the economy (inflation, rising interest rates and dollar strength), so a robust economic rebound would favor them.
Small-cap stocks are popular among investors because of their potential for providing better returns in the long term relative to their large-cap peers.
The advantages of investing in small-cap stocks are:
1. Growth potential – Relative to bigger companies, small-cap companies show significantly higher growth potential. For small-cap companies, it is easier to grow significantly their operational and financial base than is the case for most large-cap stocks.
Picking the right small-cap stock can turn into a profitable investment.
2. High probability of inefficiencies in the market – Information about the small-cap stocks is harder to find compared to large and mid-cap companies. Analysts typically give little attention to these companies; thus, there is a high probability of improper pricing of small-cap stocks. This situation creates vast opportunities for investors to leverage the inefficiencies in market pricing and earn a great return on their investments.
3. Financial institutions do not push prices up – Financial institutions, including mutual and hedge funds, should comply with certain regulations that do not allow them to invest heavily in small-cap stocks. For this reason, it is unlikely that the stock price will be artificially pushed up because of large investments from major financial institutions.
Nevertheless, there are some disadvantages of investing in small-cap stocks:
1. High risk – Investing in small-cap stocks involves higher risk. First, small-cap companies may have an unreliable and faulty business model which can result in company’s management not being able to adjust the business model, and can result in poor operational and financial results. And, small-cap companies usually have less access to new capital and new sources of financing. Due to this reason, it is more likely that the company will not be able to bridge gaps in its cash flows or expand the business because of the inability to undertake the necessary investments.
2. Low liquidity – Small-cap stocks are less liquid than their large counterparts. Low liquidity results in the potential unavailability of the stock at a good price to purchase or it may be difficult to sell the stocks at a favorable price. Low liquidity also adds to the overall risk of the stock.
3. Time-consuming – Investing in small-cap stocks can be a time-consuming activity. Due to the under-coverage of small-cap stocks by financial media, institutions and analysts, the amount of available research on small-cap companies is usually limited.
Moreover, small cap technology and all small cap stocks are discounted to a great degree by investors in a rising interest rate environment, purely due to the fact that they have the bulk of potential earnings and cash flow far out into the future. The higher long-term rates are, the less those future earnings and cash flow are worth. This goes for virtually all unprofitable growth tech stocks.
Essentially, small-cap stocks may provide investors with an opportunity to earn a substantial return on their investments. However, this type of investing should be approached with caution as small-cap stocks are often risky and volatile.
“Attention to risk must be a 24/7/365 obsession, with people – not computers – assessing and reassessing the risk environment in real time.” ~ Seth Klarman
At an early age, Billionaire and Baupost Capital CEO Seth Klarman was fascinated with business and making money. By the age of ten he was investing in the stock market.
During Klarman’s time in the investing world, he’s been able to compound capital at a 20% annual return.
In 1991 Klarman wrote his book, Margin of Safety, and there have only been 5,000 copies printed. As a result of such a small supply and enormous demand, Klarman’s book is very expensive reselling for $1,500 to $2,500.
James Clear — who writes about habits, decision making, and is the author of the #1 New York Times bestseller, Atomic Habits — summarizes the book, Margin of Safety, as follows:
“Avoiding loss should be the primary goal of every investor. The way to avoid loss is by investing with a significant margin of safety. A margin of safety is necessary because valuation is an imprecise art, the future is unpredictable, and investors are human and make mistakes.”
2010 Baupost Capital’s annual letter
Here is an excerpt from the 2010 annual letter of Baupost Capital written by Seth Klarman. He was shocked at how quickly investors have returned to the risky investing and financial behaviors that got them in trouble during the 2008 Financial Crisis;
1. Things that have never happened before are bound to occur with some regularity. You must always be prepared for the unexpected (the Black Swan) event, including sudden, sharp downward swings in markets and the economy. Whatever adverse scenario you can contemplate, reality can and will be far worse.
2. When excesses such as lax lending standards become widespread and persist for some time (e.g., ninja (no income, no job and no assets) loans), people are lulled into a false sense of security, creating an even more dangerous situation. In some cases, excesses migrate beyond regional or national borders, raising the ante for investors and governments. These excesses will eventually end, triggering a crisis at least in proportion to the degree of the excesses. Correlations between asset classes may be surprisingly high when leverage rapidly unwinds.
3. Nowhere does it say that investors should strive to make every last dollar of potential profit; consideration of risk must never take a backseat to return. Conservative positioning entering a crisis is crucial: it enables one to maintain long-term oriented, clear thinking, and to focus on new opportunities while others are distracted or even forced to sell. Portfolio hedges must be in place before a crisis hits. One cannot reliably or affordably increase or replace hedges that are rolling off during a financial crisis.
4. Risk is not inherent in an investment; it is always relative to the price paid. Uncertainty is not the same as risk. Indeed, when great uncertainty – such as in the fall of 2008 – drives securities prices to especially low levels, they often become less risky investments.
5. Do not trust financial market risk models. Reality is always too complex to be accurately modeled. Attention to risk must be a 24/7/365 obsession, with people – not computers – assessing and reassessing the risk environment in real time. Despite the predilection of some analysts to model the financial markets using sophisticated mathematics, the markets are governed by behavioral science, not physical science.
6. Do not accept principal risk while investing short-term cash: the greedy effort to earn a few extra basis points of yield inevitably leads to the incurrence of greater risk, which increases the likelihood of losses and severe illiquidity at precisely the moment when cash is needed to cover expenses, to meet commitments, or to make compelling long-term investments.
7. The latest trade of a security creates a dangerous illusion that its market price approximates its true value. This mirage is especially dangerous during periods of market exuberance. The concept of “private market value” as an anchor to the proper valuation of a business can also be greatly skewed during ebullient times and should always be considered with a healthy degree of skepticism.
8. A broad and flexible investment approach is essential during a crisis. Opportunities can be vast, ephemeral, and dispersed through various sectors and markets. Rigid silos can be an enormous disadvantage at such times.
9. You must buy on the way down. There is far more volume on the way down than on the way back up, and far less competition among buyers. It is almost always better to be too early than too late, but you must be prepared for price markdowns on what you buy.
10. Financial innovation can be highly dangerous, (think cryptocurrency) though almost no one will tell you this. New financial products are typically created for sunny days and are almost never stress-tested for stormy weather. Securitization is an area that almost perfectly fits this description; markets for securitized assets such as subprime mortgages completely collapsed in 2008 and have not fully recovered. Ironically, the government is eager to restore the securitization markets back to their pre-collapse stature.
11. Ratings agencies are highly conflicted, unimaginative dupes. They are blissfully unaware of adverse selection and moral hazard. Investors should never trust them.
12. Be sure that you are well compensated for illiquidity – especially illiquidity without control – because it can create particularly high opportunity costs.
13. At equal returns, public investments are generally superior to private investments not only because they are more liquid but also because amidst distress, public markets are more likely than private ones to offer attractive opportunities to average down.
14. Beware leverage in all its forms. Borrowers – individual, corporate, or government – should always match fund their liabilities against the duration of their assets. Borrowers must always remember that capital markets can be extremely fickle, and that it is never safe to assume a maturing loan can be rolled over. Even if you are unleveraged, the leverage employed by others can drive dramatic price and valuation swings; sudden unavailability of leverage in the economy may trigger an economic downturn.
15. Many leveraged buyouts (LBOs) are man-made disasters. When the price paid is excessive, the equity portion of an LBO is really an out-of-the-money call option. Many fiduciaries placed large amounts of the capital under their stewardship into such options in 2006 and 2007.
16. Financial stocks are particularly risky. Banking, in particular, is a highly leveraged, extremely competitive, and challenging business. A major European bank recently announced the goal of achieving a 20% return on equity (ROE) within several years. Unfortunately, ROE is highly dependent on absolute yields, yield spreads, maintaining adequate loan loss reserves, and the amount of leverage used. What is the bank’s management to do if it cannot readily get to 20%? Leverage up? Hold riskier assets? Ignore the risk of loss? In some ways, for a major financial institution even to have a ROE goal is to court disaster.
17. Having clients with a long-term orientation is crucial. Nothing else is as important to the success of an investment firm.
18. When a government official says a problem has been “contained,” pay no attention.
19. The government – the ultimate short-term-oriented player – cannot withstand much pain in the economy or the financial markets. Bailouts and rescues are likely to occur, though not with sufficient predictability for investors to comfortably take advantage. The government will take enormous risks in such interventions, especially if the expenses can be conveniently deferred to the future. Some of the price-tag is in the form of back- stops and guarantees, whose cost is almost impossible to determine.
20. Almost no one will accept responsibility for his or her role in precipitating a crisis: not leveraged speculators, not willfully blind leaders of financial institutions, and certainly not regulators, government officials, ratings agencies or politicians.
The lessons investors can learn from the FTX debacle are not all that new or even groundbreaking. But, the lessons are important ones for investors to learn who desire to build long-term wealth and achieve financial freedom.
The significant lessons are the importance of investors understanding an asset and doing thorough research on companies in which they intend to invest.
In FTX’s case, here is a company, led by it’s under thirty CEO Sam Bankman-Fried (SBF), that in three years grew from relative nothing to $32B literally overnight. It’s meteoric rise attracted thousands of investors who were more than happy to invest their capital in a young company and its brash CEO.
Yet, by performing just basic research on how the company made its money, on the experience and acumen of the CEO, and on the executive management team, and on the company’s financial profitability would have raised red flag to cause serious investor to pause before investing their capital in the company.
Additionally, SBF, FTX’s thirty-something CEO was consider a “wunder-kid” of sorts and featured by Forbes as its #2 “The Forbes 400” in 2022.
In a relatively short time, SBF took FTX from near zero is capitalization to $32B. His feats caused both seasoned and retail investors to flock to FTX.
Now, at the beginning of the week, FTX possessed a capitalization of $32. By Friday, FTX was at near zero capitalization, SBF had resigned, and the luster and shine of the once high flying company had been completely tarnished.
Thus, this is a classic and stark example why investors must understand and do thorough research, and remain disciplined before investing their capital.
Walt Disney World is raising the range of prices for some of its single-day, single-park tickets at Magic Kingdom, Epcot, and Hollywood Studios in Orlando, FL ~ Janet H. Cho
Families will have to splurge more for their Walt Disney World vacations starting December 8, 2022, because some single-day, single-park ticket prices at Disney’s Magic Kingdom, Epcot, and Hollywood Studios in Orlando could cost as much as $189 a person during the nine-day peak period around Christmas and New Year’s Day.
Single-day ticket prices to Disney’s Magic Kingdom Park are increasing to between $124 and $189 a person. The $189 ticket price is specifically for that peak holiday season around Christmas and the new year, and not all year, the Disney spokesperson told Barron’s.
Single-day tickets to Disney’s Animal Kingdom are staying at the current $109 to $159 range for visitors ages 10 and up.
Single-day tickets to Epcot are increasing to a range of $114 to $179; and
Single-day tickets to Hollywood Studios are increasing to $124 to $179.
Instead of the current system, which lets visitors make their theme park reservations only after buying their tickets, the new single-day tickets automatically include theme park reservations. The price of the Park Hopper option that lets people visit a second park the same day for $65 more is also changing.
What’s Next: Except for renewals by current annual pass holders, Disney has paused new sales of all but its Pixie Dust annual passes, available to FL residents only, which are staying at $399 a person. It is raising the price of its other annual passes, including the Incredi-Pass, which is going up to $1,399.
Under a separate program, discounted multiday tickets for active or retired members of the U.S. military, their families and friends, are increasing by $20 to $369 plus tax a person for the five-day ticket package plus Park Hopper, or $349 plus tax a person for the four-day package.
Disney also added more blackout dates when military tickets aren’t eligible, including around Christmas and New Year’s this year, and around spring break and Thanksgiving next year.
Value investing involves determining the intrinsic value — the true, inherent worth of an asset — and buying it at a level that represents a substantial discount to that price.
The gap between a stock’s intrinsic value and the price it is currently selling for is known as the margin of safety.
The greater the margin of safety, the more an investor’s projections can be off while still profitably gaining from an investment in the shares of the company being evaluated.
It can be helpful to ensure you understand what value investing is and is not. It is not searching for stocks with low price-to-earnings ratios and blindly buying the stocks that make that first cut. Instead, value investors employ a series of metrics and ratios to help them determine a stock’s intrinsic value and a sufficient margin of safety.
Value investing in stocks often means looking for mispriced shares in out-of-the-way places. This can include looking at companies in out-of-favor sectors, businesses in frowned-upon industries, companies that are going through some type of scandal, or stocks currently enduring a bear market. Unpopular sectors and companies are often treasure troves for the successful value investor, requiring the possession of both a long-term approach and a contrarian mindset. Regardless of where the investments come from, though, value investing is the art and science of identifying stocks priced below their actual worth.
Successful value investing exercise patience and hold during lean times. Taking just one example, in early 2015, American Express shareholders learned that AmEx lost its exclusive credit-card deal with Costco Wholesale locations. In the following months, Amex lost almost 50% of its market-cap value. Yet far from being a moment to panic, savvy investors might have seen an opportunity to buy AmEx for outsized gains. Within three years of its lowest point, American Express had almost doubled and reached new all-time highs.
Selling at lows while negative sentiment is at its highest will guarantee frustration and permanent loss of capital. It can be hard to wait while your thesis plays out, but patience is absolutely necessary for value investors who want to beat the market.
Of course, value investing is more than a waiting game. Investors must remain diligent in staying up to date on a company to ensure their thesis is proceeding as planned. This means paying attention to the company’s business performance — not its stock price.
The Big 5 Numbers
Phil Town, founder and CEO of Rule #1 Investing, says there are “the big 5 numbers” in value investing.
The Big 5 numbers are:
Return on Invested Capital (ROIC)
Equity (Book Value) Growth
Earnings per Share (EPS) Growth
Sales (Revenue) Growth
Cash Growth
All the big 5 numbers will be 10% or greater if the company, and he numbers should be stable or growing over the past 10 years.
The big takeaway
Value investing is not easy. It requires time, focus, discipline, patience and dedication to the craft. It will often mean looking and feeling foolish while you wait for an investment thesis to play out. If this doesn’t sound like it’s for you, investing in passive index funds is a perfectly suitable alternative.
For investors who enjoy the hunt of looking for undervalued assets — and beating the market at its own game — value investing can be richly rewarding in more ways than one. By following this simple guide, investors can be well on their way to understanding how value investing can beat the market.
