Buy low, sell high: How Buffet does it
BUY low, sell high.
This is the most popular theory in stock market investing. But the question is -– how would you know when a stock’s price is ‘low’?
The key: Compare a stock’s price with its ‘value’.
How is price different from value?
– Price is what the market is willing to pay for the share at a given time. It fluctuates from minute to minute.
– Value of a stock is the worth of its underlying business. It is more stable as fortunes of a company do not change overnight.
Buy when price is lower than value
If a share’s value is Rs 150 and price is Rs 125, then you get the stock at a discount of Rs 25.
While there is no guarantee that the price will not go below Rs 125, the probability is low.
This principle is called the ‘margin of safety’ and finds it roots in the teachings of legendary investors — Warren Buffet and Benjamin Graham.