How to Find Stocks on Sale! | Phil Town | Summary and Q&A

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March 19, 2021
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Rule #1 Investing
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How to Find Stocks on Sale! | Phil Town

TL;DR

Margin of safety is a crucial concept in investing that involves buying stocks at a discount to their true value, reducing risk and increasing long-term returns.

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Questions & Answers

Q: What is the difference between price and value in investing?

Price refers to the amount at which a stock is traded in the market, while value represents the true worth of the business. Understanding this difference is crucial for making profitable investment decisions.

Q: How is the margin of safety calculated?

The margin of safety is calculated by taking a significant discount (e.g., 50%) to the value of the business. This discount accounts for potential fluctuations in stock prices and reduces the risk of capital loss.

Q: Why is patience important in investing with a margin of safety?

Patience is essential because it allows investors to wait for specific events that can significantly impact stock prices. By waiting for these events, investors can buy stocks at even greater discounts and maximize their potential returns.

Q: Can you provide an example of a company that experienced a significant event leading to a decline in stock prices?

Chipotle Mexican Grill faced an outbreak of E.coli in their restaurants, which caused their stock price to drop from $760 to below $400 within a three-week period. This event presented an opportunity for patient investors to buy the stock at a substantial discount.

Summary & Key Takeaways

  • Margin of safety is a key principle in rule one investing, which involves buying great companies at a discounted price to their true value.

  • Price is not the same as value, and understanding this distinction is important for successful investing.

  • Calculating the margin of safety requires knowing the value of the business and buying it at a significant discount.

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