You aren't buying stocks, you are buying companies
"Value investing" is an investment philosophy, the core concept is buying undervalued quality companies at a fair price, focusing on long-term growth rather than short-term price swings, and holding long-term to get returns from growth. And "3M investment rules" is a specific execution method Buffett summarized while practicing value investing, telling us how to pick investment targets
Must-know 3M rules
1. Management — choosing the right helmsman Investing is like sailing, the ship is important, but the helmsman is more critical! "Management" refers to these helmsmen — the company's management team, their integrity, ability, and shareholder awareness directly affect the company's fate. You can judge through observing history and reading annual reports, choosing a trustworthy management team is the cornerstone of successful investing.
2. Moat — building an unbreakable competitive advantage "Moat" is the sustainable competitive advantage a company has, protecting the company from competitors and maintaining long-term profitability. Common types of moats include: strong brands, like Coca-Cola, with high consumer loyalty; patented tech, like TSMC's leading tech in foundry; unique business models, like Amazon's e-commerce and Costco's membership; as well as cost advantages and network effects. Buffett believes companies with wide and hard-to-cross moats have long-term investment value.
3.Margin of Safety — buy cheap enough to earn with peace of mind Even if you find a good team and a good company, if the Buy Price is too high, it's still hard to get ideal returns. "Margin of Safety" refers to the gap between the Buy Price and the company's intrinsic value. Buffett emphasizes buying at a price far below the intrinsic value to lower investment risk. There are many ways to judge margin of safety, simple valuation methods include P/E Ratio and P/B Ratio to judge if the price is fair. Margin of safety not only lowers loss risk but also raises profit potential, when the market recognizes the company's value again, the price has a chance to rise.
[Knowledge Corner]
~ P/E Ratio is "price" divided by "Earnings per Share" (EPS).
~ If P/E Ratio is 20, it means it takes 20 years to get your money back after buying, so you need to think about your patience.
~ P/B Ratio is "price" divided by "book value per share".
~ If P/B Ratio is 2, it means investors are buying at 2 times the price, so you need to think if entering now is worth it.