Want to know what the secret to investing is?
“The real secret to investing is that there is no secret to investing. Every important aspect of investing has been made available to the public many times over, beginning in 1934 with the First Edition of Security Analysis (1934). That so many people fail to follow this timeless and almost foolproof approach enables those who adopt it to remain successful.” Seth Klarman
Seth Klarman, Chief investment officer at Baupost and is considered one of the top five fund managers in the World, measured by investment returns.
There are a number of self-promoters trying to fleece you out of a dollar, by saying to the effect, ‘want to know the secret to getting 800% returns? I know the secret and if you attend my two-day conference for only $7,000 I will tell you the secret! And all you need is a ruler.‘ Or ‘just download this latest trading software to earn 400% returns.’ It’s horse shit!
Warren Buffett, who is currently the World’s third richest man, has consistently spelt out his successful investment strategy for the last 60 years!!! Don’t believe me, here is the link to Buffett’s Partnership letters and Berkshire Hathaway Shareholder letters.
We live in the information age, where we have at our fingertips access to the world’s information. And according to the BBC, in the course of a day, the average person in a Western city is said to be exposed to as much data as someone in the 15th century would encounter in their entire life.
“We’re drowning in information and starving for wisdom.”
– Tony Robbins
95% of information out there about investing is Bull Shit!
Here I will outline an easy step by step investment process to provide you with a timeless and proven investment strategy for beginners. You have worked hard to earn the money you have now, don’t throw it down the drain by taking a punt on the sharemarket.
The investment strategy I will outline for you below has passed the test of time and can be used in a majority of countries. A booklet titled ‘What has worked in investing’, examined 44 studies that assessed the success of historically investment characteristics and approaches. The conclusion of the 44 studies provides empirical evidence that Benjamin Graham’s principles of investing work, as described in his 1934 in his book, Security Analysis, with David Dodd. Benjamin Graham taught Warren Buffett these same investing principles and they are the same investing principles I will teach you.
In a nutshell, successful investing is calculating the intrinsic value of investments including businesses, by discounting future cash flows to be taken out of the business during its remaining life. But before you start discounting the cash flows, you need to assess the quality of those future cash flows. Firstly by understanding the business, looking at the sales, the costs of operations, the value of assets, assessing the strength, if any exist, of the competitive advantages enjoyed by the business and finally assessing the management’s ability to intelligently allocate capital. Then applying a margin of safety to the purchase price, to protect you from any mistakes made during the assessment of the investment.
Let’s start by defining what investing is.
“The definition is simple but often forgotten: Investing is laying out money now to get more money back in the future–more money in real terms, after taking inflation into account.” Warren Buffett
The questions to ask is, what stock to invest in? And how long will it take to get more money back in the future then what I’m putting in now?
The second question requires a brief explanation about the role of inflation and interest rates.
Inflation is the rate at which the general price levels goods and services rise. Central banks try to keep the inflation rate in a band between 1 – 3 percent. Inflation presents to the investor their first hurdle. The hurdle is a rate of return needed to exceed each year in order to increase your purchasing power against the effects of inflation. Inflation is what causes a dollar today to be worth less in one years’ time.
Interest rates are another key consideration an investor must take note of, due to their effects on asset prices and valuations. I cannot explain better than the way Warren Buffett explained it, in this interview with Carol Looms, Fortune. Nov, 1999. [Excerpt below]
Now, to get some historical perspective, let’s look back at the 34 years before this one –and here we are going to see an almost Biblical kind of symmetry, in the sense of lean years and fat years–to observe what happened in the stock market. Take, to begin with, the first 17 years of the period, from the end of 1964 through 1981. Here’s what took place in that interval:
DOW JONES INDUSTRIAL AVERAGE: Dec. 31, 1964: 874. 12 Dec. 31, 1981: 875.00
Now I’m known as a long-term investor and a patient guy, but that is not my idea of a big move.
And here’s a major and very opposite fact: During that same 17 years, the GDP of the U.S.–that is, the business being done in this country–almost quintupled, rising by 370%. Or, if we look at another measure, the sales of the FORTUNE 500 (a changing mix of companies, of course) more than sextupled. And yet the Dow went exactly nowhere.
To understand why that happened, we need first to look at one of the two important variables that affect investment results: interest rates.
These act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull. That’s because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn from government securities. So if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates of return into line. Conversely, if government interest rates fall, the move pushes the prices of all other investments upward. The basic proposition is this: What an investor should pay today for a dollar to be received tomorrow can only be determined by first looking at the risk-free interest rate.
Consequently, every time the risk-free rate moves by one basis point–by 0.01%–the value of every investment in the country changes. People can see this easily in the case of bonds, whose value is normally affected only by interest rates. In the case of equities or real estate or farms or whatever, other very important variables are almost always at work, and that means the effect of interest rate changes is usually obscured. Nonetheless, the effect–like the invisible pull of gravity–is constantly there.
In the 1964-81 period, there was a tremendous increase in the rates on long-term government bonds, which moved from just over 4% at year-end 1964 to more than 15% by late 1981. That rise in rates had a huge depressing effect on the value of all investments, but the one we noticed, of course, was the price of equities. So there–in that tripling of the gravitational pull of interest rates–lies the major explanation of why tremendous growth in the economy was accompanied by a