Warren Buffett's Value Investing Formula (For Dummies)

Summary

This video script explores the principles of value investing, a strategy popularized by Warren Buffett and originally coined by Benjamin Graham. It emphasizes buying quality businesses at a discount to their intrinsic value and outlines four key steps: understanding the business, ensuring a durable competitive advantage ('moat'), evaluating management integrity and skill, and buying at a discount. Monash Patni, an Indian investor, shares his insights on applying Buffett's approach, advising beginners to start with businesses they are familiar with, stay within their circle of competence, and wait patiently for the right valuation to invest.

Takeaways

• 📈 Value investing is a long-term strategy focused on buying high-quality businesses at a discount to their intrinsic value.
• 🌟 Warren Buffett's success with value investing has made it a popular approach, yielding average annual returns double that of the S&P 500.
• 🔍 The strategy involves four key steps: understanding the business, ensuring a durable competitive advantage, evaluating management, and buying at a discount to intrinsic value.
• 🧐 Monash Price, inspired by Buffett, has also achieved success by applying the same principles and now shares his insights.
• 🤔 To start, follow your curiosity and interests to find businesses you understand, staying within your circle of competence.
• 🏰 Look for businesses with a 'moat' or enduring competitive advantage, which can be a low-cost structure, network effects, or a strong ecosystem.
• 📚 Research and understand the business deeply to identify why it has a competitive edge and why it will continue to thrive.
• 🕵️‍♂️ Evaluate the management team by looking at their past performance and promises versus actual outcomes.
• 💼 Management should have a track record of under-promising and over-delivering, indicating reliability and competence.
• 💰 Valuation is about estimating the business's worth and waiting for the right opportunity to buy at a significant discount.
• 🌱 Patience is key in value investing; wait for the right deals where the business is offered at a clear discount to its intrinsic value.

Q & A

What is value investing and who is credited with coining the term?

Value investing is a long-term investing strategy that involves buying high-quality businesses at a discount to their intrinsic value. It was originally coined by Benjamin Graham but popularized by Warren Buffett.

Why has value investing gained significant traction over the past 50 years?

Value investing has gained traction because Warren Buffett used this strategy to become one of the world's most successful investors, averaging 20% returns per year since 1965, which is approximately double the returns of the S&P 500 every year.

What are the four key steps of Warren Buffett's value investing approach?

The four key steps are: 1) Understanding the business, 2) Ensuring the business has a durable competitive advantage, 3) Making sure the management team operates the business with skill and integrity, and 4) Ensuring you only buy the shares when they're at a discount to intrinsic value.

Who is Monash and what is his connection to Warren Buffett's investing strategy?

Monash is an Indian man who saw Buffett's success and decided to implement the same strategy. He learned extensively about Buffett's value investing and achieved significant returns, continuing to manage money under the same principles.

How does Monash suggest finding businesses to apply the value investing strategy to?

Monash suggests following one's curiosities, reading widely, and looking for 'aha moments' where an insight into a business is discovered that most market participants do not understand or appreciate.

What does Monash mean by 'circle of competence' and why is it important to stay within it?

The 'circle of competence' refers to the area in which an investor has knowledge and expertise. It's important to stay within this circle to avoid investing in areas that one does not fully understand, thus reducing the risk of making uninformed decisions.

How can a beginner investor identify businesses within their circle of competence?

A beginner investor can identify businesses within their circle of competence by noting down the businesses that are already a part of their life, such as products and services they use regularly.

What is a 'moat' in the context of value investing and why is it significant?

A 'moat' refers to a characteristic that gives a business a durable competitive advantage, such as being the lowest cost producer, having a strong brand, or possessing a network effect. It is significant because it helps ensure the business can maintain its success over time.

How should an investor evaluate the management team of a company?

An investor should evaluate the management team by looking at their track record over the last 10 or 20 years and comparing it to what they said they would achieve. This helps determine if they have been competent and delivered on their promises.

What is the final pillar of the value investing approach and why is it important?

The final pillar is valuation, which is important because it helps determine the appropriate price to pay for the shares of a business. Understanding the intrinsic value of a business allows an investor to identify when shares are offered at a discount, representing a good investment opportunity.

How does Monash describe the process of finding a good investment opportunity in terms of valuation?

Monash describes it as waiting for an 'aha moment' where the business is offered at a price that is clearly cheap, and the investment opportunity is so obvious that it feels like being hit with a two by four.

Outlines

00:00

💹 The Principles of Value Investing

Value investing, a strategy popularized by Warren Buffett, focuses on long-term investment in high-quality businesses at a discount to their intrinsic value. The approach has been successful for Buffett, achieving an average annual return of 20% since 1965, double that of the S&P 500. The strategy involves four key steps: understanding the business, ensuring a durable competitive advantage, evaluating management's skill and integrity, and buying shares at a discount. Monash Price, an Indian investor, adopted this strategy and also achieved significant returns. He suggests that new investors start by following their interests to find businesses they understand and look for 'aha' moments that provide unique insights into a company's potential.

05:01

🔍 Identifying Your Circle of Competence

To begin value investing, Monash Price recommends identifying your circle of competence by examining the products and services you use regularly. This approach helps in understanding businesses that are already part of your life, such as social media platforms, tech gadgets, or food chains. By focusing on these familiar businesses, investors can build a list of companies they can understand well. The concept of a 'moat' is introduced as a metaphor for a business's enduring competitive advantage, which could be due to low costs, network effects, or an ecosystem that is hard to replicate. Investors should look for obvious signs of a moat when evaluating potential investments.

10:02

👔 Evaluating Management Quality

Assessing a company's management is crucial in value investing. Monash advises looking at a management team's track record over the past decade rather than future projections. By reviewing past annual reports and comparing past promises with actual outcomes, investors can determine the team's competence and reliability. The example of Elon Musk's Tesla master plan is given, where Musk's past predictions align with Tesla's current achievements, demonstrating effective management. The focus should be on whether the management has a history of under-promising and over-delivering, which is a sign of a trustworthy team.

15:04

📊 Understanding Valuation and Making Investment Decisions

The final pillar of value investing is valuation, which involves estimating a business's intrinsic value and comparing it to its market price. Monash suggests that if a business is well understood, an investor can make an informed prediction about its value. For instance, if an investor believes a company's shares are worth $100 and they are offered at $20, it's a clear buying opportunity. Investors should be patient and wait for such opportunities, as they don't occur frequently. The video concludes with a call to action for viewers interested in learning more about value investing through an eight-hour course on the Profit.ly platform, which is reinvested into creating better educational content.

Keywords

💡Value Investing

Value investing is a long-term investment strategy that involves buying high-quality businesses at a price significantly below their intrinsic value. It is the core theme of the video, emphasizing the approach popularized by Warren Buffett. The script discusses how this strategy has been successful over the past 50 years, with Buffett averaging 20% returns per year since 1965, which is approximately double the returns of the S&P 500.

💡Warren Buffett

Warren Buffett is a renowned investor and the key figure associated with value investing. The video script highlights his success in becoming the world's most successful investor by using value investing principles, which has made the strategy popular and timeless.

💡Intrinsic Value

Intrinsic value refers to the true value of a business, which may be different from its market price. The video explains that value investors look for stocks that are selling at a discount to their intrinsic value, as identified through a thorough understanding of the business.

💡Competitive Advantage

A competitive advantage is a characteristic or attribute that allows a business to outperform its competitors. In the script, it is mentioned as a key factor in value investing, where investors seek businesses with a 'durable competitive advantage' or 'moat' that can sustain their success over time.

💡Management Team

The management team of a company plays a crucial role in its success. The video script advises investors to ensure that the management operates the business with skill and integrity. It suggests evaluating the team's past performance and promises to gauge their competence and trustworthiness.

💡Circle of Competence

The circle of competence is a concept that refers to the areas in which an investor is knowledgeable and understands well. The script emphasizes the importance of staying within one's circle of competence when investing, as it helps in making informed decisions about businesses one is familiar with.

💡Disciplined Investing

Disciplined investing is about having the patience to wait for the right opportunities and not making hasty decisions. The video script illustrates this concept through the idea of waiting for 'aha moments' when the undervaluation of a business becomes clear, aligning with Buffett's approach to investing.

💡Moat

A moat, in the context of value investing, is a metaphor for a sustainable competitive advantage that protects a company from competitors. The script uses examples like Facebook's network effect and Apple's ecosystem to explain how a moat can help a business maintain its market position.

💡Monash Patni

Monash Patni is an Indian investor who has successfully implemented Buffett's value investing strategy. The script features an interview with Patni, where he explains the steps of the value investing process and how new investors can apply these principles.

💡Autobiographies and Biographies

The script suggests reading autobiographies and biographies as a way to gain insights into different businesses and how they work. This approach is part of following one's curiosity and understanding businesses that could be potential value investments.

💡Aha Moment

An 'aha moment' in the script refers to a sudden realization or insight that provides a significant advantage in understanding a business's potential as a value investment. It is used to describe the moment when an investor identifies a business that is undervalued and has strong potential for growth.

Highlights

Value investing is a long-term strategy that involves buying high-quality businesses at a discount to their intrinsic value.

Warren Buffett popularized value investing, becoming the world's most successful investor with an average annual return of 20% since 1965.

Value investing is timeless and works regardless of market conditions.

The strategy involves four steps: understanding the business, ensuring a durable competitive advantage, evaluating management integrity, and buying at a discount to intrinsic value.

Monash Pree, inspired by Buffett, implemented value investing principles and achieved significant returns.

Monash suggests starting by following your curiosities and interests to find businesses to invest in.

Stay within your circle of competence when evaluating businesses.

A business's 'moat' refers to its enduring competitive advantage, such as being a low-cost producer or having a strong network effect.

Evaluate a company's moat by considering its characteristics that give it a durable advantage over competitors.

Assess management by looking at their past actions and promises versus outcomes, not future projections.

A management team's track record is crucial for evaluating their ability to grow the business over time.

Valuation involves estimating a business's intrinsic value and comparing it to the market price to determine if it's a good deal.

Patience is key in value investing; wait for opportunities when businesses are offered at a clear discount.

The best investments are usually obvious, and if there's any doubt, it's better to pass.

Monash Pree shares his insights on implementing Buffett's value investing approach in an interview.

The video offers guidance for beginner investors on starting their investing journey with value investing principles.

Profit.ly offers an eight-hour course on stock analysis for those interested in a deeper dive into value investing.

Transcripts

value investing originally coined by

benjamin graham but popularized by

warren buffett value investing is a

long-term investing strategy that quite

simply boils down to buying high quality

businesses when the stock price

represents a solid discount to the

businesses intrinsic value now as i said

the reason that value investing gained

so much traction say over the past 50

years is because warren buffett used

this strategy to become the world's most

successful investor ever

averaging 20 returns per year since 1965

that's approximately double the returns

of the s p 500 every year

and the thing that makes warren

buffett's value investing approach so

popular is that it's absolutely timeless

it always works no matter the decade and

no matter the market conditions the

strategy can be boiled down into four

overarching steps number one

understanding the business and number

two ensuring the business has a durable

competitive advantage number three

making sure the management team operates

the business with skill and integrity

and number four making sure you only buy

the shares when they're at a discount to

intrinsic value

now as a young adult an indian man by

the name of monash price saw buffett's

success and decided to implement the

exact same strategy he learned pretty

much everything there is to know about

buffett's value investing then

implemented himself and like buffett

also achieved amazing returns now today

monash continues to manage money under

the same buffett value investing

principles and he actually recently did

an interview where he explained each

step of this process and how new

investors can implement this strategy

themselves so in this video we're going

to use monash's help to discuss exactly

how a beginner investor can start their

investing journey following warren

buffett's four key principles so with

that said let's dive into it

[Music]

so chances are as someone that's new to

investing these four pillars probably

don't mean much to you just yet and

right now you're probably wondering well

hang on how do i even start finding

businesses to try and apply this

strategy to well let's hear from monash

as to how he does it well i mean i think

that the best way to i think approach

this is

kind of like as if as if you're a

gentleman or lady of leisure i'm curious

about a lot of things

i'm very curious about a lot of

different businesses and how they work

i'm always trying to you know i'm

reading autobiographies or biographies i

read a few newspapers every day the

physical papers you could do it

digitally if you run across interesting

books

or interesting people to

understand them i think what you're

looking for

is something that hits you

like a two by four aha moment where some

company or some business you may be a

customer of

but you've then studied it and then you

come up with some

major i would say insight

into the business that most other market

participants probably don't understand

and or don't appreciate

and if that insight is meaningful

and valid

that becomes a big edge and you don't

need that to happen

even more than once a year so that's the

first step in this whole process just

first of all follow your curiosities

there's no magic website to find the

best stocks just stick to your interests

initially just be a sponge and just

learn about businesses that you find

really interesting

and as motor says what you're really

looking for is finding those little

pieces of information about those

businesses that can give you that spark

that aha moment that makes you think

there could be something to this maybe

you saw a stat that shows that facebook

has way more users than any other social

media platform you might be curious and

say i wonder if there's something to

that you might be a car lover and see

that ferrari's profit margins are around

50 whereas every other automaker is

around 20

hmm i wonder why is that and this starts

to put businesses on your radar but

there is a trick to this method and it's

to always stay within your circle of

confidence never go digging into areas

that you just know absolutely nothing

about because that will absolutely catch

you out

so

how do you know what's in your circle of

competence and thus what businesses you

might be capable of understanding you

can have a really really small circular

competence

but what is very important is staying

within the circle

not even going to the edges

stay in the epicenter

and

you know to ask the question is to

answer it

so if you're wondering if something is

within your circle of competence or not

the answer is it's not in your circle of

competence and probably i think at your

ages

what is likely the most

probable to be within your circle of

competence

are products and services that you use

regularly generally speaking i think a

good way to kind of begin your journey

in terms of understanding you know what

businesses to look at just look at all

the products and services you consume do

you go on youtube do you go on facebook

you use google do you use an apple

iphone

use a android phone what brand of

clothing do you wear

what kind of toothpaste you use

and that's i think a starting point

because generally speaking for a brand

to come through

and be something that you would trust

and use

is a very high bar and so i think that's

probably the simplest way

to start tackling the circular

competence issue so i 100 agree with

monish here the easiest way to find

businesses that you might be able to

understand is by noting down the

businesses that are already a part of

your life you know do you use facebook

and twitter do you shop on amazon do you

eat at mcdonald's do you own a google

pixel if you note down where you spend

your time and what you spend your money

on

you will just naturally start to

formulate a list of businesses that you

already subconsciously understand

reasonably well

businesses that with you know just a

little bit of reading up

they could end up very firmly in your

circle of competence so that's how you

start finding stocks that you'll be able

to understand and then from there the

next pillar of this value investing

approach is ensuring the business has a

moat so what the heck does that even

mean the more i think is a very broad uh

kind of shorthand

for

what gives a business in enduring

competitive advantage but the mode

encapsulates things like a low-cost

producer sometimes the mode is all about

that you don't need to have as much

markup

as someone else like kind of a costco

you know they're always going to be

under everyone else's price and that

gives them a strong mode for the most

part it can be quite obvious if you just

spend some time thinking about it let's

say for example you use instagram or

facebook for example you can form some

opinion

about the stickiness and

how long those businesses could thrive

and

what would it take to unseat them you

know i mean

the these are classic network effect

businesses and i think that if you

cannot get to a point where something is

a no-brainer

where you have been able to convince

yourself that this is amazing it just

passed because you know we

even if you make one decision a year

or two decisions a year

or one decision every two years that's

perfectly fine so a mode is all about

the characteristic that gives a business

a durable competitive advantage as

monash said maybe a company is the

lowest cost producer of something maybe

they have the best scale and can offer

products the cheapest like a costco

maybe they have a huge network effect

like facebook or an inescapable

ecosystem like apple you can really

start to think about why these

businesses have become so successful and

when you're looking for a moat it should

be pretty obvious you know if you're

looking into some cheapo smartwatch

company because

i don't know i wear their watch every

day but really this watch was just a

christmas gift from grandma and when all

along you really wanted an apple watch

and it's clear you know this company is

not going to have a moat

but if you're looking into coke because

you love their drinks and you realize

that despite there being plenty of

brands of near identical cola drinks

coke still manages to outsell all these

businesses you know ten to one then you

might have discovered a moat there so

absolutely when you do look into a

company you need to be able to identify

that reason

why they will stay ahead of the pack

it's a very very important step of

finding great companies and great

investments so that's the second pillar

and then we move on to the management

team how do you know whether the

management team of this company is going

to make the right moves to continue to

grow the business over time the simple

way to evaluate management is simply

look at the track record what have they

done over the last 10 or 20 years

versus what they said 10 or 20 years ago

and that's pretty easily available and

uh so you

warren and charlie don't care so much

about the projections of businesses

making or projections the manager is

making

what they care a lot about is what is

the track record of that manager or

management team it's fun to go back into

a business go back 10 years 15 years

look at the nature of the business look

at what the manager was saying

and then look at what transpired you

know did they under promise and over

deliver did they over promise and under

deliver are they competent or

incompetent i think these things start

becoming very apparent in most cases

when you start looking at

those things from a long perspective

monash raises a good point here when it

comes to management look backwards don't

look forwards because what you'll find

is that every manager is predicting good

times in the future no ceo is going to

say look we see revenue declining

substantially over the next five years

and then i think we'll probably have too

much debt and yeah look we're probably

going to go bankrupt absolutely not ceos

will always be optimistic even if their

business sucks

so instead of listening to what they say

now

look at what they've said in the past

and whether they've hit that and the

easiest way to do that is just start 10

years ago and open up their annual

report you know

in there you'll probably find some sort

of future guidance if they say hey

you know we predict long-term revenue

growth of 25 annually you know just go

and check whether they achieved that for

example elon musk in 2006 said in short

the tesla master plan is one build a

sports car two used that money to build

an affordable car three use that money

to build an even more affordable car and

four while doing the above also provide

zero emission electric power generation

options

fast forward to today

they did every single step they made the

roadster they used that money to make

the model s then they used that money to

make the model 3. oh and by the way they

also started a solar and battery

business

so

definitely with management don't look at

what they're promising right now judge

them by looking backwards look at what

they did promise and what the results

were

and then with that said finally that

brings us to our last pillar of the

value investing approach and that is

valuation how do you figure out

what you should pay for the shares of a

business if a business is within your

circle of competence

by definition you know what their

business is worth

and you don't need to do this precisely

okay i mean let's say i take a business

like coca-cola what is coca-cola worth

okay

i would say that it's likely that

coca-cola's value

intrinsic value is probably more than 15

times trailing earnings

it might even be more than 20 times

trailing earnings

if coke is offered to you at five times

trailing earnings

it's a no-brainer

it's an aha moment

if it's offered to you at 12 times

trading earnings we don't know and once

we get to we don't know you can take a

pass this is a game with no call strikes

you just keep doing that all day you

basically keep saying no to almost

everything

and what happens is that once in a while

there are these aha moments

and i think the key is that it has to

hit you between the head

with like a two by four

where you just cannot ignore it i really

like this explanation by monish once you

really understand the business

how much cash it's generating how

quickly it's growing you can make a

reasonable prediction of what the

business's future may look like

you might use a discounted cash flow

model to estimate that you know the

shares are probably worth about a

hundred dollars now and that's never a

precise figure it's always a rough

estimation uh but from that you know if

the share prices say 110 dollars easy

pass you know if it's 100

pass even if it's 90

past there's just there's too much

uncertainty to know that you're getting

a good deal but

if that company if the shares are

offered to you at say 20 dollars

as monish says

no-brainer the trick as a new investor

is to have the patience to wait for that

opportunity because honestly they don't

come around often but that's okay okay

the best investors in the world might

only make one serious investment

every other year so

best way to pick winners is just wait

until those big moat companies that are

right in your circle of competence are

offered to you at a price where it's

clear it is clear that you're buying the

business when it's very cheap if you

have any doubt don't do it you know the

best investments are usually very

obvious to you

so definitely definitely watch out be

patient and wait for that amazing

valuation but overall guys they are

monash pro bry's thoughts and opinions

on the four key pillars of the warren

buffett investing approach so i hope you

enjoyed this video i hope it maybe

taught you something gave you a little

bit of encouragement maybe if you're new

to investing and wanting to get cracking

on this investment strategy

if you did enjoy it leave a like if you

found it useful leave a like i really

appreciate it it helps this video get

shown to more people so that really

helps me out

now if you did want to take that next

step and you're like you know what you

know you win brandon i'm definitely in

with this whole warren buffett monitor

value investing approach and you wanted

just an eight hour course which just

leaves no stone unturned it just goes

video one video two video three all the

way through understanding the business

mode management margin of safety and

valuation then if you're interested you

can feel free to check out profitful uh

that's my business that i started

there's a full eight hour course on

there called introduction to stock

analysis if that's something that you

know takes your fancy and all of the

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get reinvested into making better

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overall guys that'll just about do me

for today thank you very much for

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stick around subscribe like the video as

i said and guys that's it from me for

today thank you very much for watching

i'll see you guys in the next video