the broken typewriter

By Brad Brain

People that know me know I am a big fan of Warren Buffett. He has had an enormous influence on my investment philosophy.

 “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” ~ Warren Buffett

 Buffett’s mentor was a man named Benjamin Graham. Graham has been called the founder of value investing, designed to shield investors from substantial error and teach them to develop long-term investment strategies. Graham’s book “The Intelligent Investor” outlines these timeless principles, which are just as real and relevant today as when they were first published in 1949. Buffett calls The Intelligent Investor “by far the best book on investing ever written.”

 One of Graham’s great lessons is “Mr. Market”. Graham describes a peculiar fellow named Mr. Market who faithfully shows up each morning and offers to both buy securities from you and also to sell securities to you.

The thing about Mr. Market is, he is manic-depressive.

Sometimes he shows up and is absolutely euphoric about a security, and he is willing to buy it from you at an inflated price. Other days he shows up and is completely despondent about a security, and he is willing to sell it to you at a ridiculously low price.

 You can choose to enter into a transaction with Mr. Market, or to ignore him altogether. In either case he will show up again tomorrow. Graham’s point is, the stock market should be your servant, not your master.

In simple terms, value investing involves determining the intrinsic value of an investment, and then buying the investment at a discount to its true worth. Think of it as trying to buy great investments at sale prices.

“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insight, or insider information. What’s required is a sound intellectual framework for making decisions, and the ability to keep emotions from corroding that framework.”

Warren Buffett

 Here is what a sound intellectual framework looks like: what I call, “The Essence of Buffett.”

 Own Great Businesses. If a business is doing well and is managed by people with integrity, intelligence, and energy, its inherent value will ultimately be reflected in its share price.

 Build Concentrated Portfolios. Many investors are over-diversified. This leads to a dilution of the quality of investments, with too much capital tied up in poor investments and not enough in the really good ones. Consider taking meaningful positions in a fewer number of great investment ideas rather than resorting to the second or third-best investment ideas.

 Invest in What You Know. Some investors will make an investment without really understanding why they would want to invest in a business, or even just what it is that they are investing into in the first place. This is folly. Try to know a business inside and out. It is knowledge that allows us to avoid risk.

 Ignore the Stock Market. Investment decisions should reflect an opinion of the long-term prospects for a business, not the short-term prospects for the stock market. The stock market is a tool that can be used for our advantage, it is not the arbitrator of your well-being. As Buffett says, “As far as I am concerned, the stock market doesn’t exist. It is only there as a reference to see if anyone is offering to do anything foolish.”

 Employ a Margin of Safety. The key to successful investing is the purchase of shares in good businesses when market prices are at a large discount to underlying business values, for any variety of reasons. Another great value investor, Peter Cundill, puts it this way: “I am looking to buy a dollar for fifty cents.”

 Be Patient. Many of history’s great investors have suggested that the key to their success lay not in what they did, but rather in what they did not do. They did not yield to their emotions or to the pressure to follow the crowd. Instead, they focused on the business they owned and watched as their value compounded over time.

 As the expression goes, “Stand for something, or you will fall for anything.” Consider this in the context of some of the influential developments of even just the last couple of years; the rise and fall of marijuana stocks, crypto-currencies, NFTs, the high-flying technology and new economy stocks, and the significant market volatility we have seen recently.

 With a sound intellectual framework for making decisions, and the ability to keep emotions from corroding that framework, you will find it much easier to navigate through the challenges of investing successfully over a lifetime.

Brad Brain. CFP, R.F.P., CIM, TEP is a Certified Financial Planner in Fort St John, BC. This material is prepared for general circulation and may not reflect your individual financial circumstances. Brad can be reached at www.bradbrainfinancial.com.