Buffett – Don’t buy stocks just because they are undervalued
Website design By BotEap.comBuffett, like many other great investors, tends to be very picky: He avoids the temptation to buy a stock that looks attractive at the time. Any stock can have potential value if the price is right, but Buffett isn’t fooled into buying stocks just because they’re undervalued.
Website design By BotEap.comEventually, every one of the roughly 10,000 stocks on the US list, including the world’s Qualcomms and Oracles, will be trading at an undervalued price, but only a small fraction of the 10,000 companies offer attractive long-term growth prospects . Most have poor foundations or a history of erratic growth and should be avoided. Many others will provide periodic trading profits and then languish as the investment community mines their shares and looks elsewhere for short-term gains. As you refine your stock selection over time, you’ll eventually narrow your shortlist of buy candidates down to a few dozen. You can then zero in on this list and buy them, one at a time, as their prices drop to favorable levels.
Website design By BotEap.comYou should avoid the temptation to buy stocks simply because you have cash on hand, Buffett believes. Most of the time, a small wallet invites mistakes. At the beginning of 1999, Buffett had more than $35 billion in cash and bonds in Berkshire Hathaway’s investment portfolio. He was content to hold onto this large sum of money, which was equal to the total annual output of dozens of smaller countries, indefinitely until he found suitably priced companies to buy. Rather, most investors feel the psychological urge to put their loose coins to work almost immediately. Instead of patiently waiting for their favorite stocks to decline, they buy shares of lower-quality companies without spending time studying their fundamental properties.
Website design By BotEap.comBuffett avoids this trap by identifying all the stocks he wants to own in the next few years and buying them one at a time, but only when they drop to an attractive price. If the shares do not immediately fall to the desired price, he takes no action. He knows that the odds favor a drop in price sooner or later. In the meantime, he will turn his attention to other desirable companies whose prices may already have fallen to attractive levels.
Website design By BotEap.comTo help you practice taking strikes, you should keep a list of your possible stock prices. The list should include the maximum price you would be willing to pay today for the company. Post this list in a convenient place and review it periodically.
Website design By BotEap.comThe obvious advantage of stocking is that it forces you to be vigilant. Before you buy, you need to determine a fair value of the company, which means studying the company. Spending some time on valuation tests will greatly decrease your chances of buying prematurely. Buying companies this way also allows you to build the portfolio you really want and prevents you from adding undesirable stocks simply because you have idle money. Also, the method taps into your impatience and more importantly, it guarantees superior performance because you will overpay for any undertaking.
Website design By BotEap.comYou should update your checklist periodically to make sure your target prices are reasonable. If a company’s growth prospects decline, the original purchase price it set may be too high. Conversely, if the company’s fundamentals improve, the stock may not return to its buying level again. In such cases, you need to reassess the company to determine if it is really worth a higher share price.
Website design By BotEap.comThe point is, when you don’t have to invest, don’t feel like you should invest. Once you gain confidence in your own stock selection, you will naturally make fewer and fewer buying and selling decisions. Being a successful investor gives you the same luxury as having a 20-game lead over the second team in September. You can rest the bat on your shoulder and hit strikes indefinitely because it won’t change the outcome of the season.
Website design By BotEap.comPUT YOUR FAVORITE STOCKS INTO INVENTORY.