2021 Performance Review – 22.9% Average Annual Investment Returns The Last Decade
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Why It’s So Hard To Find Margin of Safety When Investing
How do you know if you’re buying a “safe” investment?
The main concept of value investing is to buy something that’s undervalued.
An easy example of this is as follows…
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Let’s say you find a stock that’s worth $1 billion but it has a market cap of $500 million. This means the company is undervalued by about 50% compared to what you think its worth.
This concept is called margin of safety.
The founder of value investing Benjamin Graham had this to say about the importance of margin of safety in his famous book The Intelligent Investor.
“If you were to distil the secret of sound investment into three words”, wrote Benjamin Graham in Chapter 20 of The Intelligent Investor, “we venture the motto, MARGIN OF SAFETY.”
Emphasis is mine above.
Here’s what Warren Buffett – the most famous student of Benjamin Graham – had to say about the importance of margin of safety in his famous speech The Superinvestors of Graham And Doddsville.
“Now, if the stock had declined even further to a price that made the valuation $40 million instead of $80 million, its beta would have been greater. And to people that think beta measures risk, the cheaper price would have made it look riskier. This is truly Alice in Wonderland. I have never been able to figure out why it’s riskier to buy $400 million worth of properties for $40 million than $80 million.
You also have to have the knowledge to enable you to make a very general estimate about the value of the underlying businesses. But you do not cut it close. That is what Ben Graham meant by having a margin of safety. You don’t try and buy businesses worth $83 million for $80 million. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000 pound trucks across it. And that same principle works in investing.”
Again, emphasis is mine above.
This concept of margin of safety is so important that in almost every single book, video, or article you read about value investing it will say something like – you need to know what the value of an investment is, so you can buy significantly below that price to have a large margin of safety.
This is 100% true.
But how do you do this?
While almost every resource on value investing tells you to value something before buying it… And to buy with a margin of safety from that price. Almost none show you how to value stocks.
This is such a problem that at the beginning of my investing career, I still had no idea how to value a stock after 6 years of learning.
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After 2,190 days or 52,560 hours of learning – give or take due to things like needing sleep and eating and leap years 😉 – I still had zero idea how to value a stock before buying it to find its margin of safety.
None.
I’d heard this concept espoused for years and believed in it… But had no idea how to value an investment after all this time.
Why does everyone say you need to value a business, but no one shows you how to do it?
I’m not sure… But I have my theories. And I’ll save these for another post.
But when I did start learning valuations it was light a light switched in my mind.
Before learning valuations, it was enormous frustration, a lot of guess work, Mr. Market kicking me in the teeth with 50% investment losses within 6 months of first investing real money, and almost zero real progress.
After learning valuations, this allowed me to earn consistently great investment returns of 23.5% on average in the portfolios I manage over the last nine years.
While investing in a much safer way because I knew I was buying cheap stocks with a huge margin of safety.
It drove me nuts that everyone said to value a stock before investing, but then no one showed you how to do so.
This problem drove me so crazy that I wrote an entire book – How To Value Invest – showing people how to evaluate and value stocks well.
But unfortunately, this is still a problem today.
There are still few people who show you how to properly value stocks… And if they do, they only show you only how to value a stock using the Discounted Cash Flow (DCF) method.
This is fine, but it generally takes a lot of time to set up, some of its inputs I don’t use at all like Beta, and it can get super complex and require high level math or at least understanding of formulas in Excel.
These are some of the major reasons I don’t use or teach DCF valuations.
But this frustration around the lack of teaching valuations is one of the main reasons we’re relaunching our Value Investing Masterclass.
Among the things you’ll learn in our Masterclass are 23 easy ways to value stocks.
These don’t require anything higher than 6th grade math… They don’t use complex formulas… And we don’t do time consuming DCF valuations either.
The 23 different valuations are so easy that once you get good at them you can do them all in under an hour… And you often don’t need to do more than a few of them to get a good idea of what the value of the stock is.
Which allows you to see if you’re buying with a large enough margin of safety or not… Fast.
This allows you to find great undervalued stocks faster. And increases your probabilities drastically of earning market beating investment returns.
If you’ve ever struggled to value stocks, you are not alone… And I’d love to help you learn how to do them well and fast, so you’ll KNOW when you’re looking at a stock with a huge margin of safety.
If you’re ready to join the Value Investing Masterclass to learn these 23 different simple valuation techniques reply to this message and say I’m In and I’ll send you more info.
Always in your service,
Jason
P.S. Right now we’re offering $9,000+ in FREE bonuses to the first 10 people who sign up to the newly relaunched Masterclass. To learn more about the Masterclass and these free bonuses click here before they’re gone.
P.P.S. We already have 2 people who have gotten these bonuses. If you want them before they’re gone, make sure to tell me I’M IN today.
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