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- Dec 9, 2014
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Think of this idea as the business version of money chasing. All you’re doing is looking at the money side of a business and forgetting where the value is.
Intelligent investing goes much further than just trying to get in before a product launches. Sony is known for their PlayStation consoles and so the idea of the inherent value of that brand is already mixed in with the total perceived value of the company (known as Market Capitalization).
The secret to long term investing is buying businesses at a deep discount to their intrinsic value with a margin of safety sufficient enough that even if you’re wrong, you can still make money. Intrinsic value looks at the totality of the present and future actions of the underlying business. If you could determine the true value of a business, you would unlock the holy grail of the stock market and make a lot of money.
Here is an example: Say I have a $20 bill. You want to buy my money. Today, I’m not really in the mood to sell so I’ll sell it to you for $25. Would you buy it? Probably not. You know the intrinsic value of that money is $20. You would theoretically lose money as soon as you bought it from me. However, if I was afraid that the economy was going to crash and thought it was no longer worth $20, I might sell it to you for $10. You, being the smart investor, believe the scare is overblown and that everything will turn out to be okay. My fear of the future is to your benefit. You snap up that deal instantly because you’re about to make a 100% return on your money.
Where does the margin of safety come in? Well, maybe the economy does hurt for a little bit and it didn’t really turn around as quickly as you thought it would. Now you want to sell that $20 to someone else. You go looking for a buyer and find someone who would be willing to pay $18. You make an $8 profit on your investment. Even though you didn’t make the full $10 and were effectively wrong, you still made a profit because your margin of safety was wide enough to protect you.
This is why so many people are scrambling to figure out what to buy right now because stocks have crashed so hard that there are a lot of companies trading for discounts. Now, just because a company was once $100 per share and now at $50, it doesn’t mean it’s going to go back to $100. But there is a greater probability that when the virus pandemic works itself out and the economy starts up again, those companies might go back to $75.
You won’t be able to time the market and it is often the case that the market will turn around before the economy does. It’s a good practice to buy as the market goes down to start building up a position. Think of these businesses as going on sale. If you are a long term investor, then you should like when prices go down.
So, is Sony worth a buy right now? I don’t know. I haven’t looked at it, but the decision is more complex than just trying to buy now before the PS5 is released and thinking it’ll go up. What if it’s a total flop and kills the brand? The market might not like it and start dumping shares. Sometimes there is no rhyme or reason for what the market does. Good news can make the market go down and bad news can make it go up. Over the long term, though, the market will work out the true value of the company.
Think of the stock market like a market of businesses and not just imaginary paper. You are literally becoming part owner of a company when you buy their shares. A small investment means a tiny fraction of the company, but if you had a significant amount of money such that you could buy every share, you would become the owner of that company. It happens all the time and is a big strategy for an investor like Warren Buffett. He makes deals in a way that he becomes the majority owner of businesses that are trading on the stock market.
This is why I love the stock market and the power it holds. Anybody can do it but a lot of people think it’s a gamble because they don’t understand it.
There is a lot more that goes into it as well but it’s probably beyond the scope of this post attempting to answer your question.
Also, sorry if there are any formatting errors or misspellings. I’m at work and typing this on my phone. Let me know if you have any other questions.
Intelligent investing goes much further than just trying to get in before a product launches. Sony is known for their PlayStation consoles and so the idea of the inherent value of that brand is already mixed in with the total perceived value of the company (known as Market Capitalization).
The secret to long term investing is buying businesses at a deep discount to their intrinsic value with a margin of safety sufficient enough that even if you’re wrong, you can still make money. Intrinsic value looks at the totality of the present and future actions of the underlying business. If you could determine the true value of a business, you would unlock the holy grail of the stock market and make a lot of money.
Here is an example: Say I have a $20 bill. You want to buy my money. Today, I’m not really in the mood to sell so I’ll sell it to you for $25. Would you buy it? Probably not. You know the intrinsic value of that money is $20. You would theoretically lose money as soon as you bought it from me. However, if I was afraid that the economy was going to crash and thought it was no longer worth $20, I might sell it to you for $10. You, being the smart investor, believe the scare is overblown and that everything will turn out to be okay. My fear of the future is to your benefit. You snap up that deal instantly because you’re about to make a 100% return on your money.
Where does the margin of safety come in? Well, maybe the economy does hurt for a little bit and it didn’t really turn around as quickly as you thought it would. Now you want to sell that $20 to someone else. You go looking for a buyer and find someone who would be willing to pay $18. You make an $8 profit on your investment. Even though you didn’t make the full $10 and were effectively wrong, you still made a profit because your margin of safety was wide enough to protect you.
This is why so many people are scrambling to figure out what to buy right now because stocks have crashed so hard that there are a lot of companies trading for discounts. Now, just because a company was once $100 per share and now at $50, it doesn’t mean it’s going to go back to $100. But there is a greater probability that when the virus pandemic works itself out and the economy starts up again, those companies might go back to $75.
You won’t be able to time the market and it is often the case that the market will turn around before the economy does. It’s a good practice to buy as the market goes down to start building up a position. Think of these businesses as going on sale. If you are a long term investor, then you should like when prices go down.
So, is Sony worth a buy right now? I don’t know. I haven’t looked at it, but the decision is more complex than just trying to buy now before the PS5 is released and thinking it’ll go up. What if it’s a total flop and kills the brand? The market might not like it and start dumping shares. Sometimes there is no rhyme or reason for what the market does. Good news can make the market go down and bad news can make it go up. Over the long term, though, the market will work out the true value of the company.
Think of the stock market like a market of businesses and not just imaginary paper. You are literally becoming part owner of a company when you buy their shares. A small investment means a tiny fraction of the company, but if you had a significant amount of money such that you could buy every share, you would become the owner of that company. It happens all the time and is a big strategy for an investor like Warren Buffett. He makes deals in a way that he becomes the majority owner of businesses that are trading on the stock market.
This is why I love the stock market and the power it holds. Anybody can do it but a lot of people think it’s a gamble because they don’t understand it.
There is a lot more that goes into it as well but it’s probably beyond the scope of this post attempting to answer your question.
Also, sorry if there are any formatting errors or misspellings. I’m at work and typing this on my phone. Let me know if you have any other questions.
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