Wednesday, March 18, 2009

Business Valuation and Mr. Market

According to Warren Buffett, you just need to learn two courses in business school.
1. How to Value A Business
2. How to Think About Mr. Market and How to Deal with the Volatility

So finance students, go and ask your lecturers on these subjects. If you cant get a good answer from your lecturer, then maybe you should change school. In my opinion, good lecturers seldom rely heavily on textbook, but more to his/her own real life experience.

Views on Risk
We learned in college that Beta is risk. But, Warren Buffett said Beta is not risk. Risk is not knowing what you are doing. If you can understand how a business works, then your risk will be lower and vice versa. Beta shows the volatility of a stock. The higher the beta, the more volative is the stock. But a high beta stock does not necessarily means that it is a risky stock. If a good company with proven long term record of profitability drops by 50%, does it meant that it is a high-risk stock and you should avoid it? But what if the company's future prospect remains intact - good to excellent? Maybe you can slowly accumulate at low levels? Dont let Mr. Market to decide for you, you must decide for yourself. Ask yourself why you invest at this price, write it down. You must be certain why you are paying this business for this price. Or else, dont buy.

If you really know how to value a business, then investing in stock market is good for you. Although historical financial performance of a company doesnt guarantee future performance, at least it acts as a good guide for business valuation. Absent the proven long term track record, how do you justify your investment? Investing is easy, but making money in stock market is not that simple. If you really want to make money by investing in stock market, you need to know something about the business that not everyone's know.

No comments:

"There is the plain fool, who does the wrong thing at all times everywhere, but there is also the Wall Street fool, who thinks he must trade all the time. No man can have adequate reasons for buying or selling stocks daily - or sufficient knowledge to make his play an intelligent play." - Jesse Livermore