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#1: The world is not coming to an end, despite how the stock market is reacting. Investor sentiment has a more pronounced impact on stock prices than fundamentals in the short to intermediate-term. In the long-term, however, fundamentals always prevail. Throughout the history of capitalism, markets have survived and fluorished after times of crisis--world wars, depressions, recessions, terrorist attacks, etc. Most recently, after 11 September the DOW fell 1,300 points in 5 days, but within six months recovered the entire loss.
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#2: Investors will always be driven by fear and greed, and the overall market and stocks will react accordingly. This volatility is simply the cost of doing business. Fear forces stocks below intrinsic value, while greed allows it to exceed intrinsic value. Value investors take advantage of emotional investors.
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#3: Inflation is the only true enemy. Trying to predict economic variables and the direction of the market or the economy is a waste of time--focus on businesses and their values, and remember Belief #1 above. Inflation has a devistating effect on investors and there is little one can do about it. Buffett says, The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislature. The inflation tax has a fantastic ability to sumply consume capital. If you feel you can dance in and out of securities in a way that defeats the inflation tax, I would like to be your broker--but not your partner.
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#4: Good ideas are hard to find, but there are always good ideas out there, even in bear markets. The stock market is really a misnomer. Rather, there is a market of stocks. Any individual investor can do well regardless of the overall market. Value investors are bottom-up investors, looking at one business at a time. Our WS8 portfolio, for example, used this bottom-up approach to achieve over 20% total returns in 2001 and 2003 while the STI index (the market) fell by over 10% each year.
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#5: The primary purpose of a publicly traded company is to convert all of the companys available resources into shareholder value. As shareowners, your job is to make sure that this happens. Companies are not only going concerns, they are also resource conversion organizations--converting all of the companys available resources into shareholder value. If this conversion does not take place, then the company is better off shutting its doors and going private. The best businesses are managed to convert resources--people, capital, brand, property, plants and equipment--into shareholder value. Management is the key.
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#6: Ninety percent of successful investing is buying right. Selling at the optimal price is the hard part. As a result, value investors tend to buy early and sell early (or never). The market is very consistent in offering investors opportunities to buy good businesses well below their intrinsic value, and at times the opportunity to sell above that value. For investors to take advantage, they must have in place a framework to know exactly when to buy and sell. Of course, for the value investor, the ideal purchase is one that can be held forever!
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#7: Volatility is not risk; it is opportunity. Real risk is an adverse and permanent change in the intrinsic value of the company. The value investor disregards day-to-day movement of the general market. The fair and intrinsic value of a business does not fluctuate as often as its stock price. Benjamin Graham is noted as saying that the market is there to serve you, not to guide you in making decisions. Real risks are the risks to cash flows and the underlying economics of the business, and they are magnified or reduced according to your initial purchase price.
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