Below is a simple article with a few basic rules for successful investing outlined by Warren Buffett. It is important to understand that cash is a depreciating asset. When we have the opportunity to invest in attractive businesses at reasonable prices, our prospects for attractive investment returns are quite high. The reason that most market participants’ aren’t successful is due to the fact that they are more worried about price movements, as opposed to business fundamentals.
A perfect example of this is the hysteria around Social Media and Cloud-based stocks. Many of these companies lose money or make little, have questionable accounting practices and trade for stratospheric valuations. These valuations imply long-term growth rates, which are rarely reached by any businesses. This means that any of these Social Media companies that don’t become the next Google or Apple, will likely lead to severe losses for shareholders’. This doesn’t stop market participants from piling in, chasing the hot IPOs with very little consideration of the actual price being paid. This works until it doesn’t but there is absolutely no margin of safety in this form of speculative activity.
Contrast that with our investments in the financial industry where we’ve acquired some of the highest quality banks and insurance companies at fractions of their liquidation values. In essence, we’ve acquired all future growth for free at a time when the balance sheets and capital ratios are safer than they have been in decades. As the global economy grows, so does loan demand and the need for prudent asset management. Most market participants agree that interest rates are destined to go higher and these companies will be some of the primary beneficiaries when that does occur. Despite these favorable trends and the considerable amount of money we’ve made over the years in these stocks, we are still buying them below liquidation value providing us with a large margin of safety. The intrinsic values of these companies are continuing to grow by 8-13% per annum adjusted for dividends, so unless the stocks appreciate by double digits per annum over the next several years, our margin of safety will only continue to increase.
These facts and other considerations lead me to believe that large and focused investments in this sector is a prudent investment activity. I’m exceptionally confident that in the next 3-5 years, we will be extremely happy that we did so. However, it is important to understand that there will be periods of volatility in the sector, which will lead us to taking short-term mark to market losses. These losses are completely irrelevant unless you are planning on withdrawing funds in the very near future and should be 100% expected. Many market participants panic in that type of environment and believe that they can predict short-term fluctuations so they bail out of stocks even though they would acknowledge that they are undervalued in relation to intrinsic value. This is extremely counterproductive because most people are inaccurate in their short-term forecasts, and find themselves chasing whatever is hot after selling more promising investments and they are also needlessly increasing their tax bills by not taking a longer-term holding period.
Investing is a simple as buying securities at deep discounts to intrinsic value, where intrinsic value is defined by the future cash flows produced by the security discounted by a hurdle rate. If you can take a similar outlook in your investments with T&T Capital Management (TTCM), I believe that you will be very pleased with your long-term results and will likely find yourself doing quite a bit better than the overall market over time.