Buffett, like many other great investors, tends to be very picky – avoid the temptation to buy a stock that looks attractive right now. Any stock can potentially be a security if the price is right, but Buffett is not fooled into buying stocks just because they are undervalued.
Over time, each of the 10,000 stocks on the US list, including the world’s Qualcomms and Oracles, will trade at an undervalued price, but only a small fraction of the 10,000 companies offer attractive long-term growth prospects. Most have poor fundamentals or a history of erratic growth and should be avoided. Many others will provide periodic trading earnings and then languish as the investment community tires of their stocks and seeks short-term earnings elsewhere. As you refine your stock selection over time, you’ll eventually narrow your shortlist of buy-ins to a few dozen. Then you can zero in on this list and buy them, one at a time, as their prices drop to favorable levels.
You should avoid the temptation to buy stocks simply because you have cash on hand, Buffett believes. Most of the time, a wallet hasy invites you to make mistakes. In early 1999, Buffett had more than $ 35 billion in cash and bonds in Berkshire Hathaway’s investment portfolio. He was content to withhold this large sum of money, equal to the total annual output of dozens of smaller countries, indefinitely, until he found companies with adequate prices to buy. On the contrary, most investors feel the psychological urge to put their loose change to work almost immediately. Instead of waiting patiently for their favorite stocks to decline, they buy stocks in lower-quality companies without wasting time to study their fundamental properties.
Buffett avoids this trap by identifying all the stocks he wants to own for the next several years and buying them one at a time, but only when they go down to an attractive price. If the stock doesn’t immediately drop to the desired price, take no action. You know that the odds favor a price drop sooner or later. In the meantime, you will turn your attention to other desirable companies whose prices may have already fallen to attractive levels.
To help you practice the strike method, you should keep a list of possible stock prices. The list should include the maximum price you would be willing to pay for the business today. Post this list in a convenient place and review it periodically.
The obvious advantage of stocking is that it forces you to be vigilant. Before buying, you need to determine a fair value of the business, which means studying the business. Spending some time on valuation tests will greatly decrease your chances of buying prematurely. Buying companies this way also allows you to build the portfolio you really want and prevents you from adding unwanted stocks simply because you have idle money. In addition, the method takes advantage of your impatience and, more importantly, it guarantees maximum performance because you will overpay for any company.
You should update your checklist periodically to make sure your target prices are reasonable. If a company’s growth prospects decline, the original purchase price you set may be too high. Conversely, if the company’s fundamentals improve, stocks may not fall back to their buying level. In such cases, you should reassess the company to determine if it is really worth a higher share price.
The point is, when you don’t have to invest, don’t feel like you should invest. Once you gain confidence in your own stock selection, you will naturally make fewer and fewer buying and selling decisions. Being a successful investor affords you the same luxury as having a 20-game lead over the second-place team in September. You can rest the bat on your shoulder and strike indefinitely because it won’t change the outcome of the season.
PUT YOUR FAVORITE SHARES IN THE INVENTORY.