Warren Buffett part 4. Prices

Finding a sustainable competitive advantage in a company's business is important, as is valuation. Finding one is not something an investor can take advantage of unless they can buy shares at the right price. Opportunities don't come along often. Not even every year. An investor needs a significant margin of safety to ensure that the price paid is right. This requires a price decline that is the result of recurring events in the stock market, in a single industry, or in a single company's business. Each of these events has unique effects on the stock prices of individual companies. Understanding and recognizing the following events will help you get shares at the right price:

1. Bear/Boom Market Cycles

2. Business Recessions

3. Single Major Setbacks in Business or Society

4. Structural Changes

5. Wars

Buffett takes advantage of price declines to buy shares. He understands that investors need them to buy great businesses at reasonable prices. A bear market is the best time to buy shares. In addition, Buffett buys businesses when investors experience a temporary panic or a temporary downward correction in stock prices during a bull market. A bear market is generally considered to be a situation where the market has fallen 20% or more from the previous peak.

According to my sources, according to Buffett's definition, bear markets require a larger price decline from the peaks. During his lifetime, there have been price declines in the early 1930s, the early 1970s, the late 1990s, and 2008/2009. In each bear market, prices have corrected tens of percent after a large price increase. Large price declines create the best situations for buying. In bear markets, you can buy the businesses of companies that benefit from a permanent competitive advantage cheaply. These peak opportunities are rarely taken advantage of.

The bear markets defined by Buffett are rare, so an investor cannot rely solely on them to expect reasonable prices. In addition, investors should be prepared for moments when the market panics for a short period of time. These moments rarely lead to changes in the profitability of the business. The best individual buying moments come when short-term market panics combine with bad news about the company's business, such as a momentary drop in earnings.

All bull markets end and a decline in prices begins. At true peaks, P/E ratios have increased from single digits to at least thirty. Eventually, the stock prices of companies whose results do not improve experience a significant increase in price. Eventually, the investment community announces that results do not matter. The result can be a bursting of a stock bubble or a long and steep decline in prices. A bear market is fast compared to a bull market, so it takes a long time for collapsing prices to return to their previous peaks.

Industry downturns offer good buying moments. When the entire industry suffers, the stock price of each company falls. The depth and length of recessions vary. A recession can lead to major difficulties or a temporary drop in profits. It helps the best companies in the long run while the worst ones are destroyed. The best companies get to buy the most profitable businesses of the worst ones at a deep discount or replace them with their own. All industries have their own cycles, so investors can prepare for the bottoms of cycles.

Sometimes even great companies make stupid mistakes that generate losses or something unexpected happens to them, such as a serious illness of the CEO. These can lead to price drops that are usually too large for the damage. Your task is to assess whether this is an isolated event or whether it causes irreversible damage to the business. A company with a lasting competitive advantage will almost always overcome such difficulties. Such losses come from lawsuits, such as price cartels.

Structural changes, such as mergers, takeovers or the establishment of new factories, can produce temporary and unexpected losses. Large project schedules sometimes get stretched. They cause a short-term decline in earnings. Investors may interpret the changes as permanent, even though they appear as earnings improvements over a longer period. This is not always the case, so investors cannot assume that this will be the case.

The threat of war can cause investors to panic. It causes them uncertainty and fear of a major armed incident. The threat of war often causes a market-wide price reaction, which causes investors to collect cash by selling their shares, leading to a temporary market disruption. Most threats do not materialize.