Finance and Investing
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With an account, you can revise, criticize, and comment on ideas.You are fallible and the future is unpredictable. It is important to buy assets for significantly less than you think they are worth. The cheaper you buy something, the more margin you have for things to go worse than anticipated. This is called a 'Margin of Safety'. Paying a higher price for something inherently makes the investment more fragile and less profitable.
A crappy business can be a good investment if you get it cheap enough, and a wonderful business can be a terrible investment if you pay too much. (The dream is getting a wonderful business for cheap.)
It is important to buy assets for significantly less than you think they are worth. The cheaper you buy something, the more margin you have for things to go worse than anticipated.
According to Austrian economics, all value is subjective. How can we then know what an asset is intrinsically worth?
I was careful to say "It is important to buy assets for significantly less than you think they are worth". Value is certainly subjective (in the sense that things are valued differently by different people).
As for methods of valuation, there are many out there, each with their pros and cons. Discounted cashflow (DCF) valuations are my preferred method as they directly address the purpose of investing: giving up value today in exchange for more value in the future. The key problem with this is that the future is inherently unpredictable, so building a DCF involves educated guesswork about the future and is inevitably imprecise (varying massively by the nature of the asset... the USD return from a US govt bond is more predictable than the USD return of a tech stock).
The unavoidable flaws in valuation methods are why we should try to buy assets at steep discounts to our valuations of them. The deeper the discount, the bigger our mistake can be without it hurting us.
I was careful to say "It is important to buy assets for significantly less than you think they are worth". Value is certainly subjective (in the sense that things are valued differently by different people).
It can't only be about what I think an asset is worth though right?🤔 Isn't the important thing to buy assets that people will value higher in the future? And in the process try to explain what people will subjectively value?
If the business is cash-flowing it doesn’t matter if other people in the market don’t bid it up. The business can buy back shares or distribute dividends to enrich shareholders.
Obviously this assumes you’ve invested in a business with competent management.