The first
RULE #1 requirement in buying a stock is that it be a wonderful business. Just that. Nothing else. We never buy anything that we don't know is wonderful. And I mean something very specific and easy to figure out when I say "wonderful." I mean a business that will continue growing at a predictable rate for 20 years. That means a wonderful business first and foremost has a PREDICTABLE rate of growth. Here is an example of a wonderful business with a wonderfully predictable rate of growth: Walgreens. WAG. Take a look at the last 25 years of equity and earnings growth rates.
But here's the catch: In order to know that a business's growth is wonderfully predictable, you have to know something about that business. It also has to MEAN something to you because if it does you will understand it more easily and more quickly. And it should not violate your values (because that makes you a hypocrite). And understand the business enough to know that they are the best at what they do (
RULE #1 investors only go with the best).
You need to know that it has a lot of automatic protection against competition. I call this a MOAT.
And you need to know that the MANAGEMENT, in particular the CEO of the company, are intent on building this business for the benefit of all the shareholders - including and most especially the owners.
These three M's are quite simple to figure out and soon you will have too many wonderful businesses that you would like to own.
The second thing is easier than knowing the business is wonderful and tends to narrow the number of wonderful businesses we can buy. The second thing is that we need to buy the stock at an attractive price. By "attractive price" I mean a price that is such a great price that I am certain that I am going to make money. This is not a difficult concept. We simply wait for what we want to buy to go on sale.
The key to this idea is the rather shocking notion that in the stock market, the price of a stock is not always the same as what it is worth. This is a revolutionary idea for some reason. Your mutual fund manager does not believe this idea. He thinks that price and value are the same - which is why he lost 40% of your money in your 401k and why your retirement, if you leave it in his hands, will not be nearly what you hope. Even a 6% annual return is out of reach for your fund managers if the stock market does not go up for the next 15 years, a probability rather than a mere possibility.
Knowing the value of a business is quite easy. Remember that its growth is predictable? So we just grow it at that predictable rate, figure out what it will be worth in ten years and then figure what we have to pay for it today to make 15%. I call that the Sticker Price, like the sticker price on the window of the new car.
Then comes the three most important words in investing: Margin of Safety (MOS). Since I'm a river guide and since since things can change even for a really wonderful predictable business, I need a big discount off of the Sticker Price. A big discount. BIG. 50%. The amazing thing about the stock market is that with patience I can buy wonderful businesses at 50% off all the time.
So can YOU do it? Why not? You won't get rich quick, probably, but you'll get rich eventually. If all you do is invest $300 a month, you'll be able to retire comfortably in 20 years starting with nothing.
Remember, buy a wonderful business at an attractive price. This is the key to good investing for the last hundred years and it will continue to be the key for the next hundred.
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