저자: HamishHodder · 외국인
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2022년 1월 주식시장 급락 국면에서 워런 버핏의 투자 원칙을 정리하며 투자자가 대응할 방법을 설명하는 영상이다. 글로벌 금리 및 인플레이션 환경이 주식 밸류에이션에 미치는 영향을 중심으로 다룬다. 시장 배경: 2021년 S&P500은 27% 이상 상승했고 기업 이익은 49% 증가했다. 2022년 초에는 나스닥이 고점 대비 12% 하락했다. 금리와 밸류에이션: 연준 기준금리는 2008년 금융위기 이후 2.4%를 넘지 않았고 장기간 0% 근처였다. 저금리는 기업의 저렴한 차입과 자산 가격 상승으로 이어졌다. 금리가 오르면 주식의 상대적 매력이 떨어지며, 10년물 국채 수익률이 0.4%에서 2% 부근으로 오른 점을 예로 들었다. 인플레이션: 미국 물가상승률은 7%, 영국은 5.4%이며 2~3% 범위를 크게 벗어났다. 공급망 문제와 통화정책 등으로 고인플레이션이 1년 이상 이어질 가능성이 높다고 진행자는 판단했다. 고인플레이션과 금리 인상 우려가 투기적 기술주와 암호화폐 하락의 원인이라고 설명했다. 버핏의 대응 원칙 1: 폭락장에 대비해 현금을 확보하고, 과대평가 주식을 피하며, 관심 기업 워치리스트를 만들라고 권한다. 진행자 본인은 2020년 3~4월 폭락 이후 약 90%를 투자했으나 이후 큰 신규 투자는 하지 않고 배당과 사업 소득을 쌓아 두고 있다고 밝혔다. 원칙 2~4: 능력 범위(circle of competence) 안에서 투자하고, 지속 가능한 경쟁우위(경제적 해자)를 가진 기업을 고르며, 유능하고 정직한 경영진이 있는 기업을 택한다. 코카콜라(브랜드), 어도비(전환 비용)를 예로 들었다. 밸류에이션: 내재가치는 기업이 미래에 창출할 현금을 적정 할인율로 할인한 값이다. 주가가 하락하면 같은 현금흐름에 대한 기대수익률이 높아지므로 하락이 오히려 기회가 될 수 있다고 봤다. 진행자는 추가로 자신의 투자 커뮤니티 'Learn by Example'을 홍보했다.
다듬은 글
People because they can make decisions every second and stocks, whereas they can't with foreign. They think, and then FESMAN in stocks is different than an investment in a business or an investment in a farmer investment or an apartment. Well, 2021 was yet another record year for the stock market. The S and P 500 in the U S grew over 27% on the back of a 49% increase in corporate earnings.
And that was despite global supply chain issues. The deadliest COVID. High inflation and the beginning of tighter monetary policy from the federal reserve. But then the markets took a turn that I'm sure a lot of people were not surprised by starting in mid-November markets became significantly more volatile.
The NASDAQ index, which mostly tracks us tech-related companies is down 12% from its highs. And most of that decline came just this week as earning season is kicking off. But regardless of whether you're watching this video towards the beginning of 2022, when it's released. Or whether you're watching this at some point in the future during some other market downturn in today's video, you're going to get some value out of looking at how Warren buffet, the greatest investor of all time thinks we should invest during a market crash with clips, from buffet, interviews, and shareholder letters over.
If you enjoyed today's video and get some value out of it, I would very much appreciate it. If you could just leave a like on the video, that's small action from you helps my channel out a ton. But with that said, let's jump into the video. Before we get into the strategies that we can implement to invest in this volatile and crashing stock market.
Let's first set the scene. And talk about why stocks are falling in the first place. Interest rates have been rock bottom for a long time. Now, historically, as you can see, the federal funds rate set by the federal reserve has been as high as 19%, but it's mostly been in the mid to high single digits, but since 2008, the global financial crisis, the rate hasn't gone above 2.4%.
And it's actually been rock bottom near 0% for many of those years, since 2008 and rock bottom interest rates creates two key effects that are really important to understand if you are going to be investing in the markets. The first is that lower interest rates or near zero interest rates essentially allow businesses to expand at a rapid rate by taking on really, really cheap debt and using it to expand their business, to invest in things that they could have.
If they didn't have access to near 0% interest rates on debt. The second effect is that since all asset classes, from bonds to stocks, to cryptocurrency, to the property market returns on all of these investments are connected. So when interest rates or returns, in other words, on safer government bonds and safer investments, when that is going down, the return on stocks also goes down because.
And evaluation gets back to interest rates. And if you take the U S treasury bill, now we'll call it an 80 basis points. What maturity that means the us treasury bill was selling at 125 times earnings. Now, if that, if your alternatives to buy something at 125 times earnings or a good business, whose earnings will probably increase it 15 or 18 times earnings, you've got to measure.
The, the, uh, uh, the risk, isn't really a risk-free and some of it, but the, the, the standard rate and interest rates are like gravity and valuations. I mean, if interest rates are nothing, you know, values can be almost. Uh, if interest rates are extremely high, that's a huge gravitational pull on values.
And we had that in the early night. Now this may seem counter-intuitive, but when I say lower returns on stocks, what I mean is that stock prices are forced up to all time. Highs since an investment is simply a comparison between what you pay for that stock, what you outlay and what you get back from that stock in the future.
When we see stock prices rising really quickly, it's essentially the same as saying, I am willing to accept a lower return on this stock. A more visualized way to think about this is if you pay $50 for a stock and then the business produces a hundred dollars for you over 10 years, that will produce a higher return than if you pay $75 for that same.
That's still returns you $100. So while the stock market has been riding on this great wave of lower interest rates, what we might be starting to see is a reversal in that trend and starting to see interest rates actually go up. So the next logical question is will we see interest rates go up significantly over the next year, over the next couple of.
And the answer to that question, mostly lies with what happens with inflation. When the amount of spending and incomes grow faster than the production of goods, prices rise. When prices rise, we call this inflation. The central bank doesn't want too much inflation because it causes problems. Seeing prices rise.
It raises interest rates with higher interest rates. Fewer people can afford to borrow money. And the cost of existing debts rises at the moment. Inflation is 7% in the us and 5.4% in the UK. And the rate of inflation in the U S has been far above the two to 3% range. Since April of last year, I'll cover the biggest drivers of inflation that we're seeing right now in another video.
But all you need to know for right now is that while we can't predict what inflation will do in the future, it is kind of, it's futile to think that you can figure out exactly what inflation will be in the future. The fact is that we're seeing right now in terms of supply chain issues, monetary policy, and a bunch of other things.
Increase the probability that we're going to see high inflation over the next year. So what we're seeing right now with stocks coming down broadly, but led by speculative tech stocks and other risky asset classes like cryptocurrency is in my opinion, a consequence of high inflation. Directly affecting businesses, but then also the looming threat of higher interest rates, which makes stocks look less attractive in comparison to other asset classes.
Think about this in late 20, 28, 10 year us treasury bond would have earned you a point. The percent return. So if the alternative risk-free safe investment in a us government bond is 0.4%, then pretty much any return that's positive in a stock would be acceptable to an investor. But now bonds are at almost 2% and it wouldn't be out of the question for it to hit three to 4% at some point.
And all of a sudden that bond, that was 0.4%. If it gets to three to four, All of a sudden, it's not looking all that bad. Particularly as uncertainty rises in the stock market and people look for a safe place to put their money that can generate somewhat of a return. So let's get into what you came for for this video.
How does Warren buffet think that you should be navigating this kind of stock market? Again, this may seem counter-intuitive, but if you intend on investing a lot of money in the stock market, building your retirement finder. Decade or more than what we're seeing right now is actually exactly what you want because stock price is coming down opposite.
To the example we spoke about earlier, stock pricing prices coming down means that the return on those stocks is going up. And we can flip that example from before. If you buy a stock at 75 and it returns you 100 short, that's fine. But if it falls to 50 and you buy it and then it returns you one more.
That is a better return than when the stock was at 75. In fact, it doesn't even matter if you bought it at 75 first, as long as you have cash available to continue buying as it goes down towards 50. And that leads us to Warren Buffett's tip number one, when it's raining. We rush outside carrying wash tubs, not teaspoons.
You need cash available to invest in a market crash. The more that you have available when the market is crashing the better. Now that certainly doesn't mean go out and sell all of your stocks. That would be market timing. And we have no idea if or when a crash will happen or if it does happen, how severe it will be, but a value investor like Warren buffet naturally builds more cash in their portfolio.
By avoiding overvalued stocks in a euphoric stock market to use me as an example, after the crash in March and April of 2020, I was about 90% invested in my portfolio. But since then, almost two years later, I have not made a single significant investment. I've made a couple of small investments here and there.
But I haven't put a lot of money into the market. I've essentially been allowing my dividends and income from my business that I set aside for investing to build up in my portfolio as I wait for a good investment opportunity. And the idea of going out into the rain when it's raining gold with a wash tub instead of a teaspoon or a thimble or whatever it is, uh, the idea of that isn't just about having.
Cash. It's also about being prepared with a watch list of great businesses that you want to invest in. So you need to be building a watch list of a handful of businesses that clearly meet Warren Buffett's four key investing principles. This is the, it says knowable and important. Is there anything in that box?
And can you tell what's in that box and what isn't in that. And it's what I call knowing your circle of competence. The first of Buffet's principles is to invest in businesses. Well, within your circle of competence, circle of competence refers to the idea of investing in businesses that you deeply understand, that you understand how they work on an economic basis.
How do they make money? What are their expenses? What is the industry look like? What is the competitive landscape? What are the opportunities in front of the business? What are the tailwinds? What are the headwinds understanding on a deep level? The businesses within the market, within the industry that you're investing in.
But to me, it also means that you want to invest in businesses that have values aligned with yours and in businesses that you're passionate about because in order to develop a deep understanding of a business and to be comfortable investing a lot of money into a company, you're going to need to do a lot of research into the background of that business and other businesses that it competes against.
And the only way that you're going to be able to do that is if it's an area that you're passionate about, that gets you excited. And I think that's a critical part of how we can focus on businesses that we understand. One other aspect of Buffett's principles in regards to circle of competence. Is that not only should you invest within your circle of competence, but you should stay right around the middle and go nowhere near the.
So essentially, if you are not sure whether you understand the business, then you probably don't and just stick to businesses that you clearly clearly understand and can project forward for. I have a video dedicated to this and all of Buffett's other principles that I'll leave links to down in the description below go wild.
There'll be a ton of links down there as same with the previous video. Um, so go check them out. If you're interested in, we're trying to find a, a business with a wide and long lasting motor around. Uh, surrounding and protecting a terrific economic castle with an honest Lord in charge of the castle.
If you've got a big castle in there, people are going to be trying to figure out how to get to it and what we have to decide. And most, most, most aren't worth a damn. And, you know, in capitalism, I mean, th th that's the nature of it, and it's a constructive thing that that's the case, but we are trying to figure out what is keeping, why has that cow.
Still standing. And what's going to keep it standing or cause a not they standing 5, 10, 20 years from now. What are the key factors and how permanent are the Buffet's second principle is to invest in businesses with a sustainable competitive advantage. Something that he calls a wide economic moat. The way that I think about an economic mode is simply a unique characteristic about the business, something.
Unique only this business has it, that other businesses don't that compels customers either psychologically or actually compels customers to continue to buy products or services at higher volume each year from that company and an economic moat can look. A lot of different things. So it could be a psychological compulsion to buy from that company.
And what I mean by that is they could have a powerful brand. Right? Think about something like Coca-Cola, for example, they have a huge moat. There's nothing really stopping you from switching to an alternative, but every year people continue to buy Coke, even though it's a lot of. Then the off-brand, uh, competitors, and it's also often a lot more than just its other soft drink.
Competitors. People still come back and they buy more and more volume and Coke consistently is able to raise prices as well, but it might not actually be a psychological compulsion. It could be a monetary compulsion. Uh, think about something like Adobe. For example, they have a powerful switching cost.
Mark. If a business has thousands of employees or hundreds of employees that are all trained to use Adobe software. That is a massive cost for the business. If they are going to switch to a competing product because not only will they have to switch, uh, but they'll have to retrain all their employees to use that new software.
So as a result, they have this powerful moat that compels businesses to continue using Adobe products. Again, I have a couple of videos going in depth of how you can identify these competitive advantages in businesses. Again, I'll leave a link down in the description below the third of Buffett's principles is that we need to invest in businesses with.
And competent management team. When we buy a stock, we are owners in the business, but we're not managers, right? We're not buying a controlling interest. You can't buy a couple of shares and then go into the office building and start telling people what to do. Um, we are outsiders essentially from the company and we rely on a team of executives at the top of the company to make good decisions within the.
I like to think of it this way. If you had two businesses that were identical, but one had a crappy management team that only cared about making the most money for their own pocket. And the other one had a founder was running the company and they cared about making the business as big as possible and satisfying customers.
Even if those two businesses. The same competitive advantage, the same products. Clearly the business that is found or run with passion will make better decisions and therefore deliver more cash to us, which is ultimately what we're trying to do when we're investing in businesses. And when we look at management, there's really two key aspects we're focusing on the first is that we need to trust that the management team is going to be honest with us in their communications to us, that they're going to be transparent about what's going on.
And that when they set goals for the future ambitions, for where the company can be, that they are reasonable projections about what the company can do in the future. And then not only do we, they need to be honest with us. They actually have to be good at their job. Right. It's it's no good if they were just an honest CEO, but they're terrible at their job.
They have to be good. And, and what that means for the executive team and for the CEO. Is, they have to be great capital allocators. They need to be able to take profits produced by the business and reinvest it back into the business to grow the company and grow profits into the next year. And it also means that the management team needs to keep the company in strong financial health.
So if there is a recession or something happens in the economy that is negative towards the business, that it's not going to go bankrupt, that it's not going to get into financial trouble. I have a video cover, a couple of different videos on that. Covering all of those aspects, again, linked down in the description below.
And then finally the most exciting part of investing, at least for me, is that we need to invest in these great businesses that meet those characteristics. We need to invest in them at an appropriate price. Well, intrinsic value is what is the number that if you were all knowing about the future and could predict all the cash that the business would give you between now and judgment day discounted at the proper discount.
That number is what the intrinsic value of businesses and other. The only reason for making an investment in laying out money now is to get more money later on. Right? That's that's what investing is. As I've mentioned a couple of times through this video, every single investment, no matter what you're investing in, no matter what asset class it is, every single investment is just a relationship between what you outlet.
And what you get back. So valuation or intrinsic valuation is simply the process of figuring out what we can get back from this business. What is reasonable that we could see coming in, and then we can compare that to what the price is, what we have to outlay and see if that relationship makes sense.
If it doesn't make sense, then we can also figure. At what price would it make sense? How far would the stock need to fall for us to invest in the business and get enough money back, uh, for it to be a good investment? And you guessed it? I have a lot of videos on valuation. Um, a lot of videos. I think it's probably the most tricky part of the entire process to do.
Right. It's probably easy to do it. Terribly, but to do it right. And actually project forward reasonably, which is what you need to do. Uh, it can be very difficult. So I've got a number of videos on that. I'll leave them linked down in the description below. And then the last part of this video, I just want to talk about learn by example, which is a private investor community that I run.
Uh, essentially if you understand these key principles, if you will. Th this video, and you've heard that a few times, but you do want to take the next step and dive deep into how to apply this to real businesses and get really good results. Then you may want to consider joining our investor community.
You'll be joining 299 other buffet and Munger style investors who collaborate to improve our returns over time. Plus you get close to. To meet with our Q and a live streams, 80 hours of my stock analysis on real companies, evaluation crash course, and much more. If that sounds like something that you would be interested in, then make sure you check out the link in the description below for more information about the limited spots that are available, but that's all for today's video.
I hope you guys got some value out of it. Leave a like on the video, if you did. I would very much appreciate it. And as I said, that small action helps my channel out a ton. So if you can, uh, I would appreciate it if you don't want to that's of course fine as well. Hope you guys have a great rest of.
And I'll see you in the next video. People because they can make decisions every second and stocks, whereas they can't with foreign. They think, and then FESMAN in stocks is different than an investment in a business or an investment in a farmer investment or an apartment. Well, 2021 was yet another record year for the stock market.
The S and P 500 in the U S grew over 27% on the back of a 49% increase in corporate earnings. And that was despite global supply chain issues. The deadliest COVID. High inflation and the beginning of tighter monetary policy from the federal reserve. But then the markets took a turn that I'm sure a lot of people were not surprised by starting in mid-November markets became significantly more volatile.
The NASDAQ index, which mostly tracks us tech-related companies is down 12% from its highs. And most of that decline came just this week as earning season is kicking off. But regardless of whether you're watching this video towards the beginning of 2022, when it's released. Or whether you're watching this at some point in the future during some other market downturn in today's video, you're going to get some value out of looking at how Warren buffet, the greatest investor of all time thinks we should invest during a market crash with clips, from buffet, interviews, and shareholder letters over.
If you enjoyed today's video and get some value out of it, I would very much appreciate it. If you could just leave a like on the video, that's small action from you helps my channel out a ton. But with that said, let's jump into the video. Before we get into the strategies that we can implement to invest in this volatile and crashing stock market.
Let's first set the scene. And talk about why stocks are falling in the first place. Interest rates have been rock bottom for a long time. Now, historically, as you can see, the federal funds rate set by the federal reserve has been as high as 19%, but it's mostly been in the mid to high single digits, but since 2008, the global financial crisis, the rate hasn't gone above 2.4%.
And it's actually been rock bottom near 0% for many of those years, since 2008 and rock bottom interest rates creates two key effects that are really important to understand if you are going to be investing in the markets. The first is that lower interest rates or near zero interest rates essentially allow businesses to expand at a rapid rate by taking on really, really cheap debt and using it to expand their business, to invest in things that they could have.
If they didn't have access to near 0% interest rates on debt. The second effect is that since all asset classes, from bonds to stocks, to cryptocurrency, to the property market returns on all of these investments are connected. So when interest rates or returns, in other words, on safer government bonds and safer investments, when that is going down, the return on stocks also goes down because.
And evaluation gets back to interest rates. And if you take the U S treasury bill, now we'll call it an 80 basis points. What maturity that means the us treasury bill was selling at 125 times earnings. Now, if that, if your alternatives to buy something at 125 times earnings or a good business, whose earnings will probably increase it 15 or 18 times earnings, you've got to measure.
The, the, uh, uh, the risk, isn't really a risk-free and some of it, but the, the, the standard rate and interest rates are like gravity and valuations. I mean, if interest rates are nothing, you know, values can be almost. Uh, if interest rates are extremely high, that's a huge gravitational pull on values.
And we had that in the early night. Now this may seem counter-intuitive, but when I say lower returns on stocks, what I mean is that stock prices are forced up to all time. Highs since an investment is simply a comparison between what you pay for that stock, what you outlay and what you get back from that stock in the future.
When we see stock prices rising really quickly, it's essentially the same as saying, I am willing to accept a lower return on this stock. A more visualized way to think about this is if you pay $50 for a stock and then the business produces a hundred dollars for you over 10 years, that will produce a higher return than if you pay $75 for that same.
That's still returns you $100. So while the stock market has been riding on this great wave of lower interest rates, what we might be starting to see is a reversal in that trend and starting to see interest rates actually go up. So the next logical question is will we see interest rates go up significantly over the next year, over the next couple of.
And the answer to that question, mostly lies with what happens with inflation. When the amount of spending and incomes grow faster than the production of goods, prices rise. When prices rise, we call this inflation. The central bank doesn't want too much inflation because it causes problems. Seeing prices rise.
It raises interest rates with higher interest rates. Fewer people can afford to borrow money. And the cost of existing debts rises at the moment. Inflation is 7% in the us and 5.4% in the UK. And the rate of inflation in the U S has been far above the two to 3% range. Since April of last year, I'll cover the biggest drivers of inflation that we're seeing right now in another video.
But all you need to know for right now is that while we can't predict what inflation will do in the future, it is kind of, it's futile to think that you can figure out exactly what inflation will be in the future. The fact is that we're seeing right now in terms of supply chain issues, monetary policy, and a bunch of other things.
Increase the probability that we're going to see high inflation over the next year. So what we're seeing right now with stocks coming down broadly, but led by speculative tech stocks and other risky asset classes like cryptocurrency is in my opinion, a consequence of high inflation. Directly affecting businesses, but then also the looming threat of higher interest rates, which makes stocks look less attractive in comparison to other asset classes.
Think about this in late 20, 28, 10 year us treasury bond would have earned you a point. The percent return. So if the alternative risk-free safe investment in a us government bond is 0.4%, then pretty much any return that's positive in a stock would be acceptable to an investor. But now bonds are at almost 2% and it wouldn't be out of the question for it to hit three to 4% at some point.
And all of a sudden that bond, that was 0.4%. If it gets to three to four, All of a sudden, it's not looking all that bad. Particularly as uncertainty rises in the stock market and people look for a safe place to put their money that can generate somewhat of a return. So let's get into what you came for for this video.
How does Warren buffet think that you should be navigating this kind of stock market? Again, this may seem counter-intuitive, but if you intend on investing a lot of money in the stock market, building your retirement finder. Decade or more than what we're seeing right now is actually exactly what you want because stock price is coming down opposite.
To the example we spoke about earlier, stock pricing prices coming down means that the return on those stocks is going up. And we can flip that example from before. If you buy a stock at 75 and it returns you 100 short, that's fine. But if it falls to 50 and you buy it and then it returns you one more.
That is a better return than when the stock was at 75. In fact, it doesn't even matter if you bought it at 75 first, as long as you have cash available to continue buying as it goes down towards 50. And that leads us to Warren Buffett's tip number one, when it's raining. We rush outside carrying wash tubs, not teaspoons.
You need cash available to invest in a market crash. The more that you have available when the market is crashing the better. Now that certainly doesn't mean go out and sell all of your stocks. That would be market timing. And we have no idea if or when a crash will happen or if it does happen, how severe it will be, but a value investor like Warren buffet naturally builds more cash in their portfolio.
By avoiding overvalued stocks in a euphoric stock market to use me as an example, after the crash in March and April of 2020, I was about 90% invested in my portfolio. But since then, almost two years later, I have not made a single significant investment. I've made a couple of small investments here and there.
But I haven't put a lot of money into the market. I've essentially been allowing my dividends and income from my business that I set aside for investing to build up in my portfolio as I wait for a good investment opportunity. And the idea of going out into the rain when it's raining gold with a wash tub instead of a teaspoon or a thimble or whatever it is, uh, the idea of that isn't just about having.
Cash. It's also about being prepared with a watch list of great businesses that you want to invest in. So you need to be building a watch list of a handful of businesses that clearly meet Warren Buffett's four key investing principles. This is the, it says knowable and important. Is there anything in that box?
And can you tell what's in that box and what isn't in that. And it's what I call knowing your circle of competence. The first of Buffet's principles is to invest in businesses. Well, within your circle of competence, circle of competence refers to the idea of investing in businesses that you deeply understand, that you understand how they work on an economic basis.
How do they make money? What are their expenses? What is the industry look like? What is the competitive landscape? What are the opportunities in front of the business? What are the tailwinds? What are the headwinds understanding on a deep level? The businesses within the market, within the industry that you're investing in.
But to me, it also means that you want to invest in businesses that have values aligned with yours and in businesses that you're passionate about because in order to develop a deep understanding of a business and to be comfortable investing a lot of money into a company, you're going to need to do a lot of research into the background of that business and other businesses that it competes against.
And the only way that you're going to be able to do that is if it's an area that you're passionate about, that gets you excited. And I think that's a critical part of how we can focus on businesses that we understand. One other aspect of Buffett's principles in regards to circle of competence. Is that not only should you invest within your circle of competence, but you should stay right around the middle and go nowhere near the.
So essentially, if you are not sure whether you understand the business, then you probably don't and just stick to businesses that you clearly clearly understand and can project forward for. I have a video dedicated to this and all of Buffett's other principles that I'll leave links to down in the description below go wild.
There'll be a ton of links down there as same with the previous video. Um, so go check them out. If you're interested in, we're trying to find a, a business with a wide and long lasting motor around. Uh, surrounding and protecting a terrific economic castle with an honest Lord in charge of the castle.
If you've got a big castle in there, people are going to be trying to figure out how to get to it and what we have to decide. And most, most, most aren't worth a damn. And, you know, in capitalism, I mean, th th that's the nature of it, and it's a constructive thing that that's the case, but we are trying to figure out what is keeping, why has that cow.
Still standing. And what's going to keep it standing or cause a not they standing 5, 10, 20 years from now. What are the key factors and how permanent are the Buffet's second principle is to invest in businesses with a sustainable competitive advantage. Something that he calls a wide economic moat. The way that I think about an economic mode is simply a unique characteristic about the business, something.
Unique only this business has it, that other businesses don't that compels customers either psychologically or actually compels customers to continue to buy products or services at higher volume each year from that company and an economic moat can look. A lot of different things. So it could be a psychological compulsion to buy from that company.
And what I mean by that is they could have a powerful brand. Right? Think about something like Coca-Cola, for example, they have a huge moat. There's nothing really stopping you from switching to an alternative, but every year people continue to buy Coke, even though it's a lot of. Then the off-brand, uh, competitors, and it's also often a lot more than just its other soft drink.
Competitors. People still come back and they buy more and more volume and Coke consistently is able to raise prices as well, but it might not actually be a psychological compulsion. It could be a monetary compulsion. Uh, think about something like Adobe. For example, they have a powerful switching cost.
Mark. If a business has thousands of employees or hundreds of employees that are all trained to use Adobe software. That is a massive cost for the business. If they are going to switch to a competing product because not only will they have to switch, uh, but they'll have to retrain all their employees to use that new software.
So as a result, they have this powerful moat that compels businesses to continue using Adobe products. Again, I have a couple of videos going in depth of how you can identify these competitive advantages in businesses. Again, I'll leave a link down in the description below the third of Buffett's principles is that we need to invest in businesses with.
And competent management team. When we buy a stock, we are owners in the business, but we're not managers, right? We're not buying a controlling interest. You can't buy a couple of shares and then go into the office building and start telling people what to do. Um, we are outsiders essentially from the company and we rely on a team of executives at the top of the company to make good decisions within the.
I like to think of it this way. If you had two businesses that were identical, but one had a crappy management team that only cared about making the most money for their own pocket. And the other one had a founder was running the company and they cared about making the business as big as possible and satisfying customers.
Even if those two businesses. The same competitive advantage, the same products. Clearly the business that is found or run with passion will make better decisions and therefore deliver more cash to us, which is ultimately what we're trying to do when we're investing in businesses. And when we look at management, there's really two key aspects we're focusing on the first is that we need to trust that the management team is going to be honest with us in their communications to us, that they're going to be transparent about what's going on.
And that when they set goals for the future ambitions, for where the company can be, that they are reasonable projections about what the company can do in the future. And then not only do we, they need to be honest with us. They actually have to be good at their job. Right. It's it's no good if they were just an honest CEO, but they're terrible at their job.
They have to be good. And, and what that means for the executive team and for the CEO. Is, they have to be great capital allocators. They need to be able to take profits produced by the business and reinvest it back into the business to grow the company and grow profits into the next year. And it also means that the management team needs to keep the company in strong financial health.
So if there is a recession or something happens in the economy that is negative towards the business, that it's not going to go bankrupt, that it's not going to get into financial trouble. I have a video cover, a couple of different videos on that. Covering all of those aspects, again, linked down in the description below.
And then finally the most exciting part of investing, at least for me, is that we need to invest in these great businesses that meet those characteristics. We need to invest in them at an appropriate price. Well, intrinsic value is what is the number that if you were all knowing about the future and could predict all the cash that the business would give you between now and judgment day discounted at the proper discount.
That number is what the intrinsic value of businesses and other. The only reason for making an investment in laying out money now is to get more money later on. Right? That's that's what investing is. As I've mentioned a couple of times through this video, every single investment, no matter what you're investing in, no matter what asset class it is, every single investment is just a relationship between what you outlet.
And what you get back. So valuation or intrinsic valuation is simply the process of figuring out what we can get back from this business. What is reasonable that we could see coming in, and then we can compare that to what the price is, what we have to outlay and see if that relationship makes sense.
If it doesn't make sense, then we can also figure. At what price would it make sense? How far would the stock need to fall for us to invest in the business and get enough money back, uh, for it to be a good investment? And you guessed it? I have a lot of videos on valuation. Um, a lot of videos. I think it's probably the most tricky part of the entire process to do.
Right. It's probably easy to do it. Terribly, but to do it right. And actually project forward reasonably, which is what you need to do. Uh, it can be very difficult. So I've got a number of videos on that. I'll leave them linked down in the description below. And then the last part of this video, I just want to talk about learn by example, which is a private investor community that I run.
Uh, essentially if you understand these key principles, if you will. Th this video, and you've heard that a few times, but you do want to take the next step and dive deep into how to apply this to real businesses and get really good results. Then you may want to consider joining our investor community.
You'll be joining 299 other buffet and Munger style investors who collaborate to improve our returns over time. Plus you get close to. To meet with our Q and a live streams, 80 hours of my stock analysis on real companies, evaluation crash course, and much more. If that sounds like something that you would be interested in, then make sure you check out the link in the description below for more information about the limited spots that are available, but that's all for today's video.
I hope you guys got some value out of it. Leave a like on the video, if you did. I would very much appreciate it. And as I said, that small action helps my channel out a ton. So if you can, uh, I would appreciate it if you don't want to that's of course fine as well. Hope you guys have a great rest of. And I'll see you in the next video.
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