Secrets of Investing

Benjamin Graham, author of The Intelligent Investor and Warren Buffett's teacher, said you need three things in order to become a successful investor:

1. Every time you buy a stock you need to think about it like you're buying the whole business and you're a business owner. Buying one share of Microsoft should be viewed the same as buying the corner pizza shop, let's call it Pizza Express. When you become a business OWNER, all you should care about is how much cash is in the cash register at the end of the day after all the bills have been paid. This is what the great investor Bruce Berkowitz says. That is all you can pocket as an owner.

2. Take advantage of Mr. Market whenever you can. Mr. Market was a man created by Benjamin Graham. He is completely crazy. It used to be every day, but now in the day of the internet it's every second, he is offering to buy you out of your Pizza Express business. He doesn't know what you paid for it. In fact, you paid $100,000 cash and have no debt on the business. He offers you $90,000 right now. Do you accept? Do you panic? You still have the same amount of cash in the cash register today. People are still buying pizzas. So you tell him to stick it where the sun don't shine. But he keeps coming back. $80,000...$75,000...$99,000...$105,000... So you have two choices. One, take advantage of him, buy more Pizza Express stores when the offering is low or two IGNORE HIM. There is no reason to watch the stock market daily, weekly, monthly, quarterly or even yearly. Warren Buffett said they could close the market for years and he wouldn't care.

3. Buy with a margin of safety. If your Pizza Express, which you paid $100,000 for, generates $10,000/year to you (and you don't work in it), that means after 10 years you'll have your investment back and start making money on your investment. This, of course, assumes no increase in your annual income nor any appreciation potential in the business. So buying with a margin of safety would say, I only want to pay $50,000 for this Pizza Express. That way, if people start buying less pizzas, or if costs of ingredients skyrocket or if "fill in your own" happens, then it won't take me so long to get my money back. Buying what you believe is a $100,000 business for $50,000 lowers your chances for a loss.

I think the main point of all of this is in trying to help investors control their behaviors, because controlling your behaviors is of utmost importance. As a business owner (stockholder), focus on the cash in the cash register. Stop listening to Mr. Market (watching stock prices) and buy or use managers who buy with a margin of safety. Then go golfing, fishing or hiking and enjoy your life. You'll only be following the advice of the greatest investor ever.