The pillars to successful investing

The Five Pillars To Succeed As An Investor

From my experience in stock market, and from my readings of the world’s greatest investors, I have learnt that successful investing (that makes you rich while keeping you sane) depends on just a few factors.

These are the cornerstones of how to sensibly invest in stocks, using everything I’ve learned.

The Business
A stock is a share in a business. Repeat it! A stock is a share in a business.

A stock is not a piece of paper like speculators and traders treat it as. A stock represents part ownership in a business. Benjamin Graham, the father of value investing, wrote that ‘investment is most intelligent when it is most businesslike’.

This is a statement which Warren Buffett has regarded as the most important words about investing ever written.

Circle of competence
‘Do what you are best at’ is one important advice that every teacher gives her students. This is exactly what the teachers of value investing will tell you – never stray outside your circle of competence…outside what you know.

In simpler terms, you must invest in a company whose business you can understand with ease. Great investors have become great by following this very principle of ‘circle of competence’. And those who did not give a heed to this, their poor stock market returns speak for themselves.

Intrinsic value
“Price is what you pay, value is what you receive,” goes the famous saying. We employ this in everything we buy. And we almost never pay a price that we believe is higher than the value a thing provides.

But this principle is rarely used when it comes to investing in the stock markets. Value is rarely considered a determinant of the price most people pay for stocks they buy.

It is a bad policy to not consider the value of a business before buying its stock.

Mr. Market
Stock prices fluctuate, sometimes wildly. Some of these fluctuations aren’t bad! In fact, these provide the sensible, value investor a good hunting ground to identify quality stocks at throwaway prices.

As Buffett once said, “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”

Margin of safety
These are considered the three most important words in investing.

Margin of safety is simply the difference between the intrinsic value of a stock (or the core value of its underlying business) and its market price. It suggests that one should buy a stock only when its intrinsic value is worth more than its price in the stock market.

The key advantage of using margin of safety while investing is that it minimizes the chances of permanent loss of capital. You must include the margin of safety principle in your investing to preserve your capital.

Bringing It All Together

Each of these five pillars of value investing enhances the others. Together, they’re much stronger than they would be if any of the pillars were missing.