The secret to long-term investment success is to treat stocks as what they are: businesses, not soul-less numbers on a ticker.
Start your stock analysis with 2 questions:
1. Do you want to be in this business? And
2. Would you feel comfortable owning this company if the stock market was closed for five or ten years?
Margin of safety
It’s a common worry to have: you bought stock of a company that you feel confident will do well in the long term, but you’re still afraid of the unexpected. Maybe you don’t know what’s really going on on the inside. Or maybe life will just throw some lemons your way and cause the company’s earnings to deteriorate. You can’t predict everything.
The way to deal with this problem is to buy $1 worth of stock for less than that. That discount is your margin of safety.
The margin of safety has 2 functions: it is there to make you money (when your fifty-cent dollar goes to a full dollar) and to protect you when unexpected things happen.
Margin of safety requirements will vary from company to company and will depend in large part on two factors: the company’s quality and its earnings/cash flow growth rate.