Stock Market Investing: Key Principles with Warren Buffett, Charlie Munger & Peter Lynch | Lukas Vyhnalek | Skillshare

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Stock Market Investing: Key Principles with Warren Buffett, Charlie Munger & Peter Lynch

teacher avatar Lukas Vyhnalek, Microsoft Employee, Programming Teacher

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Topics include illustration, design, photography, and more

Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

8 Lessons (1h)
    • 1. Introduction / What Will You Learn?

    • 2. Can You Do Well In Stock Market?

    • 3. Is Stock Market Risky?

    • 4. Peter Lynch: Know What You Are Buing

    • 5. Warren Buffett: Buy Piece Of a Business

    • 6. Charlie Munger: Value & Price

    • 7. Warren Buffett & Charlie Munger: Margin Of Safety

    • 8. How To Compute Intrinsic Value (DCF Analysis)

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About This Class

In this class I want you to learn the key concepts of stock market investing.

This class is designed so that it provides the best value for your time that is why we are skipping stuff like ratios. In my opinion, there are much more important concepts that you need to learn before you buy your first stocks.

What will you learn?

  • Can you make money in stocks?

  • Is the stock market risky?

  • Peter Lynch's most important rule

  • The concept of buying a piece of business

  • The concept of value investing

  • How to compute an intrinsic value (DCF analysis)

The good thing is that you don't need any prior knowledge for this course. The course is great for beginners as well as for people with some experience in the stock market.

Meet Your Teacher

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Lukas Vyhnalek

Microsoft Employee, Programming Teacher


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1. Introduction / What Will You Learn?: Hello everyone. My name is Luke had been investing for over five years and I'm here to tell you some information about stock market investing and some key concepts that you might need to learn before you invest in an historian. So what will you actually learn in this course? You will learn whether you can actually make money in stocks and how much you can make. I also show you some sort of example of if you like boots 10 thousand, how much we will make in 50 years if, if the market will return, the average return. Also, I will talk a little bit about whether stocks are risky. I will also talk about key concepts of investing. This is probably the most important part. I'm pretty sure that you don't want to hear the stuff from me. That's why I use a recording of legendary investors like Peter Lynch, Warren Buffett or Charlie Munger. I've used recordings from interviews with these legends and I sort of use them to prove my point and to actually show you some key concepts that these people use in order to do well in stock markets. So who is this class for? In my opinion, it's for everyone. Literally, if you are a complete beginner who never bought any stocks, I think that you have a great value that you can take away from this course. If you are some experienced person who already have some experience in the market, I think that you can still find a lot of value from those key takeaways from those interviews with Peter Lynch, Warren Buffett, right? I pinpoint some key concepts that you should definitely understand. So feel free to skip maybe some lectures that you already know about, about, I think that you can find a lot of value in this class even if you are experienced investor. So why should you choose this glass? In my opinion, this class returns the best value for your time. Especially those key concepts are very crucial for every investor out there. If you are a long-term investor, you have to know these concepts and you have to stick to them if you want to do well in the stock market. And in my opinion, it's much more important to know these key concepts rather than knowing exactly every ratio there is PE ratios, price to book ratios, and all the other stuff like how to compute the intrinsic value. What I'm trying to say is that the key concepts are in my opinion, much more important than all of those fancy stuff around it. And that's pretty much it, I guess I'll see you in the class. 2. Can You Do Well In Stock Market?: So can you make money in stock market? Well, the quick answer to this question would be yes, that it depends. Usually the average investor doesn't make a lot of money in the stock market. In this video, I will talk about the reasons why and what can you do to change it? Can you make money in stock market? Definitely, yes, D average annualized return for the S and P 500 is 9.8%. And this is an average from the best 90 years. So this is like a huge amount of data we have, right? 9.8% as is actually pretty good. Sadly, the average investor doesn't reach this sort of return. Let me show you an example. If you, for example, started with $10 thousand and you added every year, at the beginning of the year, you added $2 thousand to your account and your annual return would be the 9.8%. So basically the average return of the broad market over 50 years, you would get $3,451,124, which is a lot. And this is the effect of compounding. If you every year get the 10% return, it will compound and compound and compound. And in the end, you will have a lot of money. You may also notice one thing. What do you think will be the return? If you, for example, invest only over 40 years, make a guess. It will actually be only one million and three free 100, thousands. So that's basically almost a third of the money that you would have made. You state then years longer. And this is a huge thing to wrap your minds around. The effect of compounding basically have the highest impact in the end. Because when you have a lot of money in the stock market, the 9.8% from 1 million is $98 thousand. That's a lot of money, but 9.8% from 10 thousand is just $980. There is a huge difference in this, okay? Let's say that we stay in the market only 4-5 years. Pretty bad return if you put it in the terms of money, and we will actually result with $29 thousand. And if a thing about it, you are actually putting into the market 20 thousand of your own money, right? That's your investment. That's the money that you put in. Yeah. I'm I mean, third of your money in five years, it's pretty good return, but it's not like a huge astronomic number, right? And so for these sort of high numbers, like million and free millions, you have to stay in the market for long periods of time. Stock market is not some sort of get rich quick scheme. It really takes up tens of years, right? Maybe even like 50 years in order to really, for the compounding to really have an effect. But that was with the average return of the S and P 500, which is the broad index fund, consists of 500 largest companies in the US. But what do you think is the return of an average investor? Well, it's actually a lot smaller. Smp 500 is somewhere around here with 9.9%. Okay, that's pretty good. Then we have some sort of portfolios like 60% stock, 40% bonds, right? Bonds are thought of as a sort of safer investment, right? It doesn't fluctuate too much and you get your interest payment every year. So they are considered safer. But as you can see over the long term, stocks outperform bonds by pretty large margin. You may think like 3% isn't a lot, but when you take into consideration the compounding, it's a huge amount. Okay? It's like really allowed. Also you can, you can see other things like gold and oil, right? Even gold outperforms the average investor. The average investor, as you can see right here, barely keeps up with inflation. What is inflation? Well, it just means that your money loses some of its value over the time, okay, so for example, if I have $100 thousand today in the year from now, it will be worth somewhere around 97,600, okay? So basically the value of the money goes down and the average investor barely keeps up with the inflation. What that means, it means that the average investor basically usually gets from the market what he put it in. So in our example, for example, with the 5-years, the investor put in $20 thousand and he would get something around $20 thousand back. So why do we suck it investing, right? If you think about it, if you put all of your money into SMP 500, some ETF that tracks this index. So for example, SPI or some other, you would basically get the return of the market. So it is really easy to get the return of the S&P 500. You just put all of your money into spy. So y D, average investor doesn't do this. Well. There are a couple of reasons for that. Usually people just wants to be in control and they feel like they are the smartest human beings and they can do better than the average. So they are basically trying to beat the market. And as you saw on the previous chart, it usually doesn't end up well, but there are definitely a lot of exceptions. For example, like Warren Buffet and definitely auto investors who are beating the market on a consistent basis. But people like Warren Buffet are more like a exception than a rule. So the average investor usually adjust things short-term, right? People often have some sort of short-term mindset. They just want to get rich quick. And this is just not for a investor. A good investor doesn't think this way, right? He doesn't think like, I want to get rich in the next six months, right? He knows that investing will take a long time before it will have a result. People have all sorts of psychological biases that affects their decision-making. And we are really emotionally driven human beings. And when you are investing in stocks, it's not really a good thing to be emotional. Another thing why investing might not make you rich. Is that you need funds, okay, as I showed you in those first examples, right? The amount of money that you put in from the beginning, we'll have a great effect on the money that you will have if you have 20% return in a year, it is a great, You are great investor. But if you have this return on, let's say a $1000, it means that you will end up with just 1, $1200. Some other investor that have a, let's say 9.8% return, but is investing with a $100 thousand will earn much more. Okay? And another thing is that we are pretty bad at investing, right? We like to gamble. We, we would love to buy speculative stock, right? So we would love to risk harmony. We just loved this and we also love to invest without doing any proper research. And I always find this fascinating that people are able to do tremendous amount of research when DR. buying a fridge or a television or whatever, right? Or some laptop. But take dont research what company they are buying. And I mean, if you buy a laptop for unalike won $1000, yeah, I mean, you should do some research. But when you are buying a company with all of your life savings, right, with I know, let's say just then tens of thousands of dollars. You should probably do much more deeper research, ten, when you are buying a laptop, right? The simplest way to actually improve the, Your turn is to just invest in an index fund. And there are a lot of people out there that would recommend investing in a index fund. One of them would be Warren Buffett. Warren Buffett himself, even though he beats S and P 500 over a long period of time, right? He has a great track record, is probably the best investor of all time. Even he will recommends to the average investor to buy a index fund. But for some people who are able to do some research, have a investing strategy and they follow that strategy, right? They don't invest with their emotions. They don't invest for the short term. They are long-term investors that are able to stay in the market for 5102030 years. They are usually active investors and they are usually trying to beat the market. And they definitely can be the market. A lot of great investors like Peter Lynch would say that you as an individual, have everything you need in order to be DSMP 500 and earn more than just those 9.8% annually, right? Peter Lynch, for example, earned almost 20% annually, right? Which is a great track record, right? And he basically things that everyone can do well in the stock market. If you have, you have the brainpower, you have everything that you need in order to do well. All you have to do is just do some research and learn about how to invest, right from those bright people like Warren Buffett or Peter Lynch himself. And you got this right. It's not that hard. But on the other hand, a lot of people disagree with Peter Lynch on this issue. And they think that it is really hard to beat the market. And I think so too. I think that it's extraordinarily hard to beat the market. And most fund managers can't do that, okay? Most fund managers that work in those fancy banks and wear a fancy suits or whatever, right? They can't beat the SMP 500. So yes, investing can make you rich, can make you money. You can earn a lot of money in when you are investing. But an average investor doesn't earn a lot. Usually, for an average investor, it might be smarter to just buy an index fund. And also another thing is that you have to stay in the market for a long period of time. So for example, like 50 years. For some people, it might make sense to be an active investor. So that means you actually pick the stocks and you don't invest in a index fund, you do your research and you are trying to beat the average investor. Because if you can be the S and P 500 only by a few percentage point, it will make a huge difference in the end, in the long term, right, in those 20 years. So, yes, that's pretty much it. I hope you enjoyed this lecture. 3. Is Stock Market Risky?: So is it risky to invest in a stock market? Well, it depends. So the conventional understanding of risk is volatility. Volatility basically means by how much the market goes up or down in a single days or like in a month, basically by how much it moves. Okay. If you have a big swing, even in the upward direction. A lot of people would say that the stock market is wall tile and that it is risky. On the other hand, a lot of people, for example, like Charlie Munger, argue that even if stock a is more volatile, digital, if you have a nut, so diversified portfolio, right? When you have, for example, only five stock, usually you will have much more volatile volatility right on your way. But that doesn't necessarily mean that your portfolio is more risky. But I bet that you don't want to hear these things from me. So I decided to show you a footage from Peter Lynches lecture and also from Charlie Munger. By the way, Charlie Munger is the right-hand man of Warren Buffett. They are basically making dose investment decisions together. So he's a really wise man and he's also a great investor, one of the best of all time. So they all talk a little bit about risk before you start to invest, ask yourself one question. When will I need to use this money? The stock market is a long-term investment. If you need to use the money anytime soon, you should not invest in stocks. This is money you're willing to put in the market and leave it there for 5102030 years. That's the kind of money you're gonna do well with. If you're worried about it, don't invest in. The stock market is volatile. Individual stocks are volatile. The average range for stock in a year is 50% between its highest slow stocks go up and down. The market goes up and down. If you're investing with a one or two year time horizon, you shouldn't be an individual stocks. You shouldn't be an equity mutual funds. If you've been lucky enough to save up lots of money to send your children to college and they're starting school in two years, what are you gonna do if the market goes down? And the long-term, 101520 years or more, stocks have beat bonds and bank certificates of deposits. And the short-term. There's no telling what will happen. Well, it got to be the occasion in corporate finance departments of universities. Are they developed a notion of risk adjusted returns? And my best advice to all of you would meet a totally ignore this development. Risk had a very good colloquial meaning, meaning a substantial chance that something would go horribly wrong. And finance professors got volatility mixed up with all our police mathematics. I don't make organs. So the key takeaways from Peter Lynches lecture would be that the stock market as well tile, right? And that an average investor, if you don't want to invest for the long run, for 510 years or more. You shouldn't be in individual stocks, you shouldn't be in an index, right? You should probably use bonds or something that is less risky and less volatile. Stocks go down and up. And if you are not a long-term investor, You might invest in a wrong time. And then if you need these MAN, if needed money in two years, you might be in a really bad situation. And Charlie Munger sort of brings back the point that the way we are measuring risk is pretty stupid, right? If you have a sock that might go up 10% or down 10%. And you say that this is less risky investment than a stock that might go up 100% or go down 20% or whatever, right? It just doesn't make sense, right? That's just stupid. So yeah, that's just another way people are looking at, at risk. But the main takeaway from this lecture is that stocks are world tile, okay? And it might seem really risky to invest in a stock market. And it definitely is if you are investing for the short term, right? If you're investing for the next 23 years, you shouldn't be in stock market. You shouldn't be Definitely, you shouldn't be an individual stocks. You shouldn't be in index fund. You should probably be in bonds or something that is safer. But if you are investing for the long term, I mean, if the market goes down 30%, you can just buy more. You can just buy more of a great company that is at a discount. The problem is that the average investor usually doesn't leverage these market pull downs, right? When the market goes down 20 or 30%, what you should be doing is buying more. But a lot of people are selling out, right? It has a lot of things to do with the psychology. And Peter Lynch even says Dad is not your brain. That's the most important thing when you are investing in the stomach, right? Whether you have the stomach to handle that, your investment is down 50% or something like that. Okay? And it's really if you live through some crash, you will definitely know what he's talking about. You really have to keep your head straight and just don't fall victim to your emotions. And don't sell when things are doing down because you will regret it. And the average investor usually sells when things are going down, when things are going south, right? The average investor is just sending. And then when things are going up, the average investor usually have something called formal, which is when things just go up, he just called fear of missing out, right? They are fearing the day will miss out on this great opportunity. And that tomorrow the prices will be even higher and that they have to buy a. Now, it is really hard to handle this sort of psychology. That is also one of the main reason why investor have the return of only 2.5% per year. While the S and P 500.5, an average annualized return of 9.8%. So once again, it has a pretty simple fix, right? You can just by n and just forget about your investment, right? If you are, for example, buying a S and P 500 index, you can just buy the index and just forget about it. Just forget about it. Don't worry about like the news and the stock market going down or up, just by and maybe add, every time you want to invest, you want to add more fonts. Just buy more and don't worry about it. If you are an active investor, you can even use this volatility and the fear and do markets to buy more stocks at a discount relative to their intrinsic value. 4. Peter Lynch: Know What You Are Buing: Peter Lynch is considered to be one of the best investors of all time. His average annualized return as 29%. And that is an average over 13 years in which he has been the Chairman of the Fidelity Magellan fund. If you compare this 29% to the S and P 500, which have an average return of around 10% annually. It's a huge difference. Here are some other numbers. Peter Lynch is net worth as around $352 million. To this day, his performance was the best in the whole mutual fund field ever. When he was named the head of the Fidelity Magellan fund. It has an 18 million of assets under management. But when he resigned, there was 14 billion assets under management and it took him only 13 years. So Peter Lynch is definitely someone you should listen to. So here is his opinion. The single most important thing to me and the stock market for anyone is to know what you own. I'm amazed how many people own stocks. They would not be able to tell you why they own it. They couldn't say in a minute or less why they only actually, you really press them down. Did say The reason I own this is the sucker is going up. And that's the only reason. That's the only reason they own it. And if you can't explain up serious, you can't explain to a 10-year-old and two minutes or less while you want to stalk, you shouldn't own it. And that's true. I think about 80% of people who own stocks. And this is the kinda stock people liked to own. This is the kind of company people adore owning is a relatively simple company. And to make a very narrow, easy to understand product, they make a one megabit sram cmos, bipolar risk floating point data I0, I0 processes are an optimizing compiler, 16 dual port memory. I've doubled the fused metal oxide semiconductor monolithic logic chip for the plasma matrix vacuum fluorescent display. It has a 16-bit dual memory. As a Unix operating system for whetstone megaflops polysilicon emitter, high band width, that's very important. Six gigahertz, double mineralization, communication protocol and asynchronous backward compatibility Peripheral Bus Architecture for wave interleaved memory, a token ring of change backplane. And it doesn't 15 nanoseconds that capability. Now if you own a piece of crap like that, you will never make money. And somebody will come along with more wet stones and less wet stones are big and megaflops or small omega plot. You only have a fog S idea what's happened. And people buy this junk all the time. I made money and Dunkin Donuts. I can understand it. When there was recession's, I don't have to worry about what was happening. I could go there and people still there. I didn't have to worry about low-price Korean imports. I mean, I just sent out, you know, I can understand it and you laugh. I made ten or 15 times my money in Dunkin Donuts. Those are the kind of stocks I can understand. If you don't understand, it doesn't work. This is the single biggest principle. And it bothers me that people have very careful the money. The public, when they buy a refrigerator and they get a Consumer Reports, they buy a microwave oven, they do that. They asked people what's the best kind of radar range are? They are what kind of car to buy. They do research on apartments. When they go to when they go on a trip to Wyoming and I get a mobile travel guide or California. When they go to Europe, they get the Michelin travel guide. People will hear a tip on a bus on some stock and they'll put half their life savings before sunset. And they wonder why they lose money in the stock market. And when they lose money, they blame it on the institutions and program training. That is garbage. They didn't do any research that bought a piece of junk. They didn't look at the balance sheet and that's what you get for it. And that's what we're being driven to. And it's self-fulfilling. The public does terrible investing. And they say they don't have a chance is because that's the way, that's the way they're acting. I'm trying to convince people there is a method, there are reasons for stocks that go up. Coca-cola. This is very magic. It's a very magic number. Easier. Remember, Coca Cola is earning 30 times per share what they did 32 years ago. The stock has gone up 30-fold. Bethlehem Steel is earning less than they did 30 years ago. The stock is half its price of 30 years ago. Stocks and not lottery tickets is accompanied behind every stock. The company does well, the stock as well. It's not that complicated. People get too carried away. And first of all, they try and predict the stock market. That is a total waste of time. No one can predict the software. They try and predict interest rates. And this is a, if any rabbinic interest rates, right? Three times in a role that be a billionaire, it's really, there's not that many billionaires on the planet. It's very, you don't like to logic. So I had a syllogism in the study of these one has a Boston College. They can't be that many people that can pick interest rates because there'd be lots of billionaires and no one can predict the army. I had a lot of people this room around in 198182. And we had a 20% prime rate with double-digit inflation, double digit unemployment. I don't remember anybody telling me in 1981 about it. Read eyesight also by remarried they tell me one of the worst recession since the depression. So what I'm trying to tell you, it would be very useful to know what the dark matter is gonna do. It would be terrific to know that the Dow Jones average a year from now would be x. That we're gonna have a full-scale recession or interest rate's going to be 12%. That's useful stuff. Didn't ever know what though. You just don't get to learn it. So I've always said if you spent 14 minutes a year and economics, you've wasted 12 minutes. And I really believe that now I have to be, I'd be fair. I'm talking of an Economics and the broad-scale predicting the downturn for next year or the upturn are m1 and m2, 3B and all these, all these M's at the I'm talking about economics to me is when you talk about scrap prices. When I own a lot of stocks, I wanna know what's happening. Used car prices. When used car prices going up, it's a very good indicator. When I don't hotel stocks, I'm going to go to hotel octopuses. Can't, will stop someone know it's half the price of ethylene. These are facts. If alumina inventories go down five straight months, that's relevant. I can view it at Home Affordability. I want to know about my own Fannie Mae, right? Oh, no housing stock. These are facts. You get their economic facts and its economic predictions, and economic predictions, or a total waves and interest rates. Alan Greenspan's very honest guy. He would tell you that he can't predict demonstrates he can tell what short rates are going to do next six months. Try and stick them on what the long-term rate will be, three years and now they'll say, I don't have any idea. So how are you the investor specific interest rates if they had a thorough reserve, can't do it. So I think that's what you should study. History. And history is the important thing you learn from. What you learn in history as the market goes down. It goes down a lot. The math is simple. There's been 93 years a century. This is easy to do. The markets had 50 declines of 10% or more. So 50 declines in 93 years. But once every two years the market falls 10%. We call that a correction. That means that's a euphemism for losing a lot of money rapidly, but we call it a correction. And so 50 declines in 93 years, about once every two years the market falls 10%. Of those 50 declines, 15, had been 25% or more. That's known as a bear market. We've had 15 declines in 93 years. Every six years, the markets going have a twenty-five percent decline. That's all you need to know. You need it on the market is gonna go down. Sometimes. If you're not ready for that, you should note Slavs and it's good when it happens. If you like a socket 14, it goes to six. That's great. You understand a company, you look at the balance sheet, they're doing fine. And you hope to get to 22 with it. 14 to 22 is terrific. 622 is exceptional. So you take advantage of these declines that going to happen. No one knows when they're going to happen. It'll be very people tell you about it after the fact that they predicted it, but they predicted at 53 times. And so you can take advantage of the volatility market if you understand what you own. 5. Warren Buffett: Buy Piece Of a Business: One of the key principles of stock market investing is that you are buying a piece of business. When you are buying stock. Think of it as a buying of bees, of business, OK. Don't think of it as a, as a buying a lottery ticket at some price. You are actually buying a piece of no Facebook if you buy Facebook stock or piece of Microsoft if you buy Microsoft stock. And when you start to think about buying stock as a buying a piece of a business, you will be so much better off. It's actually what Warren Buffett encourages every investor to do. And it helps out a lot in some cases where, for example, if the stock market goes down, you are not looking at the price relay. You are looking at the business, right? You, you bought a business. So you will still look at the business and you will look at the fundamentals. And you will take a look at how much money they are making. And, and no, like whether there is a new competition or something, something like that. And if you see that the business hasn't really changed and the price that stock, when the down, let's say 20%, it might be a good opportunity to actually buy, right? And you will be so much better off. Also, it will take out a lot of the stress because you will take a look at the business. You will see that nothing really changed and you'll be just okay, right. Why would you sell? Well, the business is the same as it was I know a year ago or four years ago. So why would you sell right now when the stock price is going down, it doesn't make sense. So that's sort of why this is very important. You are not buying a lottery ticket or you are not buying some sort of piece of paper that have a price attached to it. You are buying a piece of business and you should think about it this way, okay, So with all that being said, do you think it's a good idea to buy Bitcoin? Well, do you see any business in Bitcoin? I I don't see any business. Does Bitcoin make money? I'm not aware of it, but the only thing how you can make money from Bitcoin is that you are, you buy bitcoin and then you hope you will sell it at a higher price to somebody else, right? That's the whole point of buying Bitcoin. But it really doesn't produce anything. And it's really not a business, right? It's just as if you would buy euro or some, some other currency. Basically it's just a currency. So if you are a investor and if you think about buying stocks as buying piece of business, you probably wouldn't invest in bitcoin. You might invest there for some other reason. For example, you think that there'll be a huge inflation with dollar or whatever, but it's not really related to stock market investing. So, yeah, Warren Buffett definitely don't recommend investing in bitcoin. So what about Tesla stock? That's let's talk has been doing pretty well recently. It's over $1 thousand. Do you think it's a goodbye? Well, if you take a look at the company, right? Does Tesla really changed? Well, it changed quite a lot, right? It changed quite a lot bad. Did it changed that much so that like, is it worth four times more than it was a six months ago? I don't think so. And these are the questions you should ask as a investor, okay? But with all that being said, there's just a basic idea. Differently is better to buy Tesla than to buy a Bitcoin. But I wouldn't recommend it. Now let's take a look at what Warren Buffett things about this issue. Well, if you own stocks like you don't know, Farmer apartment house, you don't get a quote on those every day or every week, or you look at the business and the value of American business depends on how much it delivers in cash to its owners over between now and Judgement Day. And I don't think it changes and 10% in a two month period, if you're, if you're looking at a business now you've got anything can happen in markets. I mean, anything can happen to markers. And that's why I say don't ever borrow money against securities markets, don't have to open tomorrow. I mean, you can have extraordinary events. So I think to some extent, you can get some of the instruments that people don't understand very well that have a lot of firepower at him. Volatility and the idea of people taking a position. And they're gambling, they're not investing knowledge and dusting when they buy some super charged index on the pics does or something like that, they don't need it and it's an unnecessary instrument. I'll, you know, they will create instruments that the public will buy and you can just count on that. Wall Street had been doing that since they met under the buttonwood tree in 1792 where whatever was the exchange. So, but if you're investing, if I'm going to buy a half interested in McDonald's Stan, and you're going to run it for a McDonald's franchise, you're going to run it. I look to the business to determine whether I made a good investment and I'm concerned about, you know, whether we have new competition that we do over the year. But it's the business I look at. When you're just looking at the price of something, you're not, you're not investing. I mean, if, if, if you buy something, Bitcoin, for example, are some crypto currency, you're not looking to the asset itself to produce anything. If you buy an apartment house, you're looking at the apartment house or buy a farm or look at a farm does if you buy a whole business, you're looking at how the business does. If you buy a part of a business, why shouldn't you look at how the business is going to do? Apa, people get charmed by, by lots of action and the fact that things are like what and all of that. And it does have real percussions back into the market when you get something like a TEN arrangement on the super charged on the big sum in where you can lose 90% of your money in one day. That really doesn't belong with the word investment. I mean, it's just, it's a gambling form of ACTA that you've said yourself, you talked about this. So there was a lot of nodes, right? I hope you learned a lot. Basically the main takeaway from this lecture is that you should think about buying a stock as a buying a piece of a business, right? You will be so much better off because when the stock price goes down, you'll take a look at the fundamentals, right? If the fundamentals changed, right? If there is really something wrong with the company, well, then you probably want to sell maybe. But if the fundamentals are the same, there is no new competition. The management is still doing great job. Why would you sell if the price goes down 20%, it doesn't make sense. You should probably buy more if you like the company at $10. Why wouldn't you buy more at eight? It's as simple as that. And yeah, that's pretty much it. I hope you enjoyed this lecture. 6. Charlie Munger: Value & Price: So another key concept is that we have something called value and we have something called a price. And based on these two things, we are actually deciding whether we are, whether we want to buy or rather we want to sell. So what is value? Value is something that you get when you buy a product. So for example, when I buy a laptop, I get the laptop, right? The laptop is the value. So what am I getting when I'm buying a stock? Well, the value that I'm getting is the part of the business that I'm buying. So value can be something like a great cashflow, great balance sheet, a lot of cash that the company has on hands and can read investors, right? A value can be something like a good dividend yield that the company is paying for long periods of time. Valley can be also something like, hey, management. So for example, a great CEO, when you, for example, think of a Amazon, I think that Amazon have a great CEO that have a lot of skin in the game, which means that he is owning a large portion of the company. That means he will do what's best in the shareholder's interests. You can see value in a brand. So for example, the Coca Cola brand is very valuable, right? And if you buy a share of Coca Cola, you are buying a piece of the brand. So this is actually what is value and what is the price? Well, I don't have to explain. Price hopeful is just what you are paying, right? So what do you think is more important or what do you think is the relation between value and price? From an investing standpoint, you want the value to be greater than the price. If you get, somehow, place a number on the value, right? I know it's hard to place a number on, for example, a great CEO or great brand, right? That if you could somehow place a number instead of the value, right? Then if the value is greater than the price you probably want to buy because you are getting much more in return, right? On the other hand, when the value is lower than the price, you probably don't want to buy. Why would you buy something that's that's expensive, but I bet that you don't want to hear the stuff for me. So here's Charlie Munger. You gotta remember our way of thinking. All intelligent investment is value investment. Because why would you want to buy something which wasn't worth as much as you were paying for it. And who wouldn't like buying something for less than it's worth. So the only difference, when people talk about value investing, you're always be a value investor. Now there are various ways to look for value investments, just as there are various places to fish and of the fluid. First rule of fishing is to fish where the fish are. The first rule of value investing is to find someplace to fish for value investments where there are a lot of them. And of course this gotten harder in the United States to find easy value investments because the world is so competitive. And that accounts for a lot of what you see in Berkshire where we buy securities like Apple that we wouldn't have bought in the old days when we had more mundane things that were serving us very well. So we're just looking in different places. But for value investors. And so some people may say value investor, they mean somebody that it emphasizes working capital or somebody, meaning they fish in that particular place. But I think that's all. I think it's a bad use of the language to think there's a difference between that you invest besting and other good investing. All been investing is value investing by definition. So there are just various places to fish for reimbursement. And of course, as the world gets to occur, you have to fish in places you didn't finish before. And so the idea with Apple then is that there's value there that unrecognized by the different kind of value investing. Okay, so the key takeaway from this lecture should be that the value must be greater than the price if you want to buy it. Once again, what is value is hard and can be hardly defined. It can be pretty much anything that's related to the business. But a lot of investors take a look at the hard cold numbers. And based on that, they can very easily derive the value of a business in dollars, but I will get to that in later lectures. So the main takeaway from this lecture is that when you are buying a piece of a business, the piece that you are buying have some sort of value and it can be completely disconnected from the price, right? The price is changing 10% or more in a week. But do you think the value changes 10% or more? It really doesn't. So you want to ideally, precisely compute the value and then the investing is very simple. You just want to invest when the value is greater than the price that you are paying. And how much d value is greater is called margin of safety. So let's say that we have a stock that is worth $100, but the value is $150. So the margin of safety is $50. Well, in other words, 50% and the greater the margin of safety is, the better. Let us actually, another key concept that Benjamin Graham presents in his book, The Intelligent Investor, but I will talk more about it in later lectures. So that is pretty much it. I hope you enjoyed this lecture. 7. Warren Buffett & Charlie Munger: Margin Of Safety: Hello everyone, welcome to another key concepts of investing video, I will talk about margin of safety, and I will need the help of Warren Buffett and Charlie Munger in order to do that. So what does actually margin of safety? Margin of safety just means basically buying great value at a lower price. So when the value is greater than the price, the difference between value and price is the margin of safety. Let's say I am buying a stock that is worth 130, right? So let's say 130 is the value and the price is 100. That means the margin of safety is 30% or $30 in this case. So what do you think is more important? Is more important buying a great business, or is more important buying a stock that have a larger margin of safety. Imagine that you have a great business that is trading at fair price, meaning the value is equal to the price and then you have not so great business, it doesn't have really any competitive advantage. It's operating in a very competitive field, but it has much higher margin of safety, let's say 30%. Which one you should choose? Well, if you are a long-term investor, buying great businesses is always more important, then buying the margin of safety. You should always buy great businesses that are at least trading at their fair price. Ideally, you want some margin of safety, but you shouldn't probably buy some mediocre business just because there is a larger margin of safety. That's actually what Warren Buffett wants to say to you. How do you judge the right margin of safety to use when investing in various common stocks? For example, in a dominant, longstanding, stable business, would you demand a 10% margin of safety? And if so, how would you increase this wakeup business? Thank you. We favor the businesses where we really think we know the answer. And therefore, if a business gets to the point where we think the industry in which it operates, the competitive position or anything is, is so chancy that we can't really come up with a figure. We don't really try to compensate for that sort of thing. By having some extra large margin of safety we agree to go on and try to go on to something that we understand better. So if we buy something like See's candy as a business or Coca Cola as a stock. We don't think we need a huge margin of safety because we don't think we're going to be wrong. About our, about our assumptions in any material way. What we really want to do is buy a business. That's a great business, which means a business is going to earn a high return on capital employed for a very long period of time and where we think the management will treat us right. And we don't have to mark those down a lot. When we find those factors. We'd love to find them when they're selling at $0.40 on the dollar. But we will buy those at much closer to a dollar on the dollar. But I wanted to buy a dollar on the dollar, but we'll pay something close. And if we really get the something, a great business, it's like if you see some somebody walk in the door, you don't know whether they weigh 300 pounds or 325 pounds. You still know their fat, right? And I'll have, so if we say something where we know it's fat financially, we don't worry about being precise and if we can come in and that particular example of the equivalent of 270 pounds will feel gun. But if we find, if we find something where the competitive aspects are, it's just the nature of the business that you really can't see out five or ten or 20 years because that's when investing is a seeing out. You don't get paid for what's already happened. You only got paper. What's going to happen in the future. The past is only useful to you, which gives you insights into the future. And sometimes the past doesn't give you any insights into the future. And in other cases, like the stable business that you, you postulated, it probably doesn't give you a pretty good guideline, is that what's going to happen in the future and you don't need a huge margin of safety. You should have something that you all should always. You feel you're getting a little more than what it's worth. And there are times when we've been able to buy wonderful businesses at a quarter of what they're worth, but we haven't seen those. Well, we saw it in Career recently, but you don't see those sort of things? Very often. And does that mean you should sit around and hope they come back for ten or 15, wait ten or 15 years. That's not the way we do it. If we can buy good businesses at a reasonable evaluation, we're going to keep doing it, Charlie. Yeah, your margin of safety concept boils down to getting more value than you're paying. And that value can exist in a lot of different forums. If you're paid for to one on something that's not even money proposition. Why that's a value preposition to high-school algebra. And people who don't use high-school algebra should take up some other activity. So there was a lot of knowledge. I think that the key takeaway from this video should be that you shouldn't sacrifice the business qualities of the company that you are buying over the margin of safety. And that it is much better to buy a great business like Coca-Cola or Disney with a lower margin of safety, let's say just 5%. Rather than buying a mediocre business with a larger margin of safety, let's say 20-30 percent. And that's about it. I hope you enjoyed this lecture. 8. How To Compute Intrinsic Value (DCF Analysis): In the last lecture, you've learned what is value and modest price and that we want to have greater value, that is the price. And in this lecture, we will actually talk about how to compute the value. And I will actually show you an example of Disney stock. So I will actually compute the intrinsic value of Disney. So let's get into it. What is the intrinsic value? Well, the intrinsic value is basically how much money business returns to its shareholders between now and judgment day. That's how Warren Buffett defines it. If you are an investor, you care most level, how do money, right? You care about what the business will return. I think that this sentence put it nicely what we will use in order to define the value? Well, we will use something called discounted cashflow analysis. This analysis is very easy to compute. I will provide a spreadsheet that you can use in order to compute this in a minutes. So the discounted cash flow analysis is based on a one very simple premise. And that is, money now is worth more than money tomorrow or Monday a year from now. Why is that? Well, if I have $1000 right now, I can invest it and earn, let's say, I know two or 3% yield if I invest in, I know some bonds or something like dead. So in a year from now, I would have thousand and let's say $30. So basically that's why money today is worth more than money in a year from now, let's say that you can invest it and let's say earn 9% on average, okay, so you can say that money now is worth 9% more than money year from now. And that's the simple premise under which the discounted cashflow analysis is based upon. So how do we actually compute it? So we will take something called operating cashflow, which is just how much the company earned from its operating activities. So if you have, let's say Apple, it means the money that they generated from selling galactose iPhones, all of those devices, all of those services, basically everything that that is their business. Okay. The income from that is operating cashflow. And we subtract CapEx, which is capital expenditures. Once again, a expenditures that you need in order to run this business. And what we will do, what will result with is a free cash flow. Now, we will use this free cash flow in order to project the free cash flow that will happen in the future. So let's say one year from now, two years from now, 40 years from now four years from now, five years and so on. Usually you want to count the free cash flow, five years or ten years, but you really don't know what will happen in ten years. I have no idea what the world will look like in ten years from now. So it's probably a better idea to use just 5-years, because we're five years, I think that you can have a solid idea of what will happen, then you will actually count the value after those five or ten years and the value of the business. And then you will sum all of these up. And when you sum all of these up, you will basically get how much the company is worth. Then you take how much the company is worth and divided by number of shares outstanding, and you will get your value per share. I definitely understand that this might be a little bit confusing to, especially in the beginning. So I will show you an example and that might clear things out a little bit. So let's compute the intrinsic value of Disney. So we will go to Yahoo Finance and type in here the ticker symbol for Disney, which is DIS, and hit Enter. It should take you to a page where you can see the current price off of Disney and stuff like that. Then inside here you can see the tab called financials. So you can just go there. When you click on that, it should take you once again to some page where you have the income statement, balance sheet and cash flow statement. When you are investing, you definitely want to go through all of these, okay, so you definitely want to go through the income statement. For example, C, that the revenue is growing, which is great and stuff like that. Check out the balance sheets he, how much debt the company have. But for today, we want to compute the intrinsic value and we need the cashflow numbers. So we will go to the Sketch Flow. And then down here you can actually see free cash flow. This year is, in my opinion, a little bit off because currently there's the corona situation and this trailing 12 months really doesn't present the real value of Disney. I think you can go with either this number. So with this operating cashflow and with this free cashflow, or you can do an average over three years, which will probably give you a better idea of the business as a, as a whole. So that's actually what I will do. So you can see, you obviously want to compute this, but you can see that there's about 20 billion as a average from these free years or 19 billion as an average. So if you divide it by three, you will get 6.3 or something like that. So let's go to this intrinsic value of Disney. And inside here, let's just put a 643 billion. You obviously want to compute it more precisely, but this is just an example. Ok? So there are a couple of options you might use the last year, you can use the trailing 12 months. But obviously with negative cashflow, you probably don't want to, you cannot compute the value, right? So, yeah, let me just use a free year average. In the case of Disney. Then another thing that we need to input is the expected, expected growth rate in the next five years, which I choose to be 5%. You definitely want to estimate this number by yourself, but you can use some other services like seeking alpha. If you go type in here, Disney, then go to the growth, tap in here, and then go to the long-term growth of EPS. This is what some analysts estimates, okay, So they are estimating a grove of 6.6%. In my opinion, that's pretty optimistic. And I'd much rather go with some pessimistic number. So that's why choose five. So you can use some service like that to just validate your growth rate a little bit, okay? Then you have a required rate of return. That basically means it's a fancy way of saying how much your money is worth more today than a year from now. So I'm saying that money today is worth 88% more than money year from now. And then we have a perpetual growth rate, which is 2.5%, which is pretty much the growth rate of the economy. This is the number that we use to compute how much the company is worth, five years and converts from now. So we are sort of estimating that it will grow at the base of the economy. On the right side, what we are doing is we are computing the projected cashflow. So we are taking this current cashflow, multiplying it by this 5% growth rate. And then we need to discount it to today's value, right? This is a cash flow that will happen a year from now. So we will discount it by this discount rate, this 8%, right? And we will get the today, today's value of debt future cashflow. I hope that makes sense. Ok, we do that for other years. So this one is, for example, multiple of this free cashflow from previous year. And we add once again these 5% as a growth rate. And then we are once again discounting, but we are discounting two years into the future. That means we are discounting one, the two, the one dot 08 to the power of two. Hopefully that makes sense. And once again, we compute how much is it worth today? We also compute the terminal value, which is a little bit complicated, so I don't want to get that much into details right now. Feel free to Google the terminal value. Basically in here, you just compute how much the business is worth 5-years and onwards from now, okay? And then you sum this all up and you get the total value of the company, right? It's just sum of all of these numbers. You Google the number of shares outstanding, simply type into Google, Disney shares outstanding. It'll show you the number of shares outstanding and you will see that the value of a Disney share is 70, almost $71. Price today is one hundred and forty, one hundred and eleven, sorry. So that means it's overvalued by 36%, which is a lot. Now let me show you how the estimate will change if we, let's say change this expected growth rate to 6%. So we changed it to 6%. You can see that there's not that big of a deal. But what happens if we, for example, change this required rate of return to just 7%. And you can see that there is a significant difference, right? Only 18% instead of 30, and there's just one percentage point in here. So you need to be very careful about what numbers you are putting in, okay, if you change, for example, this perpetual growth rate to 40%. He can see that once again, the change is huge at the output. So you need to be careful. I will attach this template for you so that you can use it. I highly recommend using just 2.5 in here. And I highly recommend using redder, higher required rate of return than a smaller one, even though it will result in much, much worse number. And that is pretty much it. I hope you enjoyed this lecture and I will see you next time.