Warren Buffett is considered one of the most successful investors in the world. One of his most famous quotes is:
Price is what you pay, value is what you get.
- Warren Buffett
When Buffet was 21 years old, he demonstrated he already understood that the market price and the intrinsic value of a business are two different variables.
By focusing on the key drivers that underlie the quality of a business, such as GEICO's growth in customers, financial strength, and low-cost advantage, Buffett reminds us that when you purchase shares of a company, you become a part-owner of a business.
And just as you shouldn't buy a low-quality home and risk your family's safety under a suspect roof on the advice of your real estate agent, it is critical to conduct your own due diligence and know what you own.
Using Nasdaq Composite as an example, the curve that representing the market was rebound like crazy. We should keep in mind that the market price and the intrinsic value of business different. We better have a logical value for each company.
Besides, he has another valuable personal rule for his success:
We've never succeeded in making a good deal with a bad person.
- Warren Buffett
CNBC
He shared this rule with Berkshire Hathaway shareholders in 1989. It is a short lesson for people who ever did business with shady characters. "After some other mistakes, I learned to go into business only with people whom I like, trust, and admire," said Buffett.
When Buffett was 21 years old, he said,
Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down.
- Warren Buffett
In 1951, a young stockbroker wrote into a local paper to share the investment thesis on his favorite stock. This young stockbroker was Buffett. He wrote the paper in a clear writing structure.
He described an out-of-favor industry that provided a necessary service to customers who renewed contracts annually.
He identified a company that had established a competitive advantage as a low-cost operator by eliminating auto insurance agents.
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He noted that the business had grown insurance premiums written over 36% annually for over a decade, had the potential to increase pricing, and generated margins more than triple the industry average, even more so in downturns. The company's management and board were aligned with shareholders by owning one-third of shares outstanding.
Finally, Buffett noted that the market may underappreciate the long-term value of the business: "it appears that no price is being paid for the tremendous growth potential of the company."
Source: Inc.com, Morgan Stanley
Editor: Nicole
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