Value Investing – Primary Tenet of Business (Lesson 5)
“Buy not on optimism, but on arithmetic.” – Benjamin Graham
The one statement that best explains business is ‘Buy Low, Sell High’. It is a universal principle referred to as a tenet of business. It is commonly stated in other terms such as control costs or focus on the best customer. In effect, it is a simple math equation of revenue minus costs equals profit.
With the stock market, obviously buying low and selling high is the goal for any investor. But the real problem, and it is depicted well in the illustration above, is knowing when the lows and highs exist. If you purchase the stock at its absolute lowest point in a cycle and then sold it at the highest point in the cycle, well you are either God or lucky. The simple truth is that nobody can predict either extreme. Value investors are not trying to predict either extreme; value investors only wish to identify acceptable lows (good value points) and reasonable highs to dispose of the investment. In effect, value investors merely take advantage of a good portion of this volatility with stock.
The buy low sell high tenet is not an absolute statement; it does not mean to buy the stock at the absolute lowest price and then sell it when it reaches the highest point. It means
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