Nick Maggiulli talks about a margin of safety
Episode 2452: A Margin of Safety by Nick Maggiulli of Of Dollars and Data on Making Wise Investment Decisions
The goal of Of Dollars And Data is to help you make better financial decisions using the best information available. Ultimately, Nick wants you to act smarter and live richer. As a result, this blog will cover ideas such as:
-What to expect from financial markets
-How to think about risk
-How to time investment purchases
-How to find good information and ignore bad information
-How to organize and manage your finances
-The best ways to increase your long-term wealth
And much, much more.
Though the ideas presented on this blog won’t revolutionize finance, they will provide you with a different perspective on money that you can use in your everyday life. Nick is sure of this because of the hundreds of hours of research that went into the more than 300 posts currently published on this blog.
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This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
I'm at least huh and I'm Josh Klein and we're the hosts have built for change. A podcaster mic censure. I'm built for change were talking to business leaders from every corner of the world that are harnessing change to reinvent the future of their business. We are discussing ideas like the importance of ethical, ai or how productivity soars when companies truly listen to what their employees value. These are insights,
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finance daily episode. Twenty four, fifty two, a margin of safety by nick mutually of
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We optimize your life, a margin of safety by nick, mature,
We of dollars and data dotcom on the surface, the life of christina sant house,
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Lives are mostly normal life. I tell this story because it illustrates
How amazing natural systems can be at adapting to change and thriving in the face of uncertainty, you may do so
that, after losing half a brain, most individuals would be completely non functional, but you would be wrong
since undergoing a hemisphere. Act me do experience, change motor skills, but one studies suggest that cognitive changes were not major. This is what makes life so amazing.
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The city even when we're missing an entire hemisphere. If you think about it, this all boils down to net
Oh systems, relying on redundancy to increase the chance of survival, in other words, nature, has a trick up its sleeve a margin of safety when it comes to investing having a marginal
Safety increases the chance of financial survival and is arguably the most important and difficult investment rule of all. To illustrate this consider the following question: what is the most?
important piece of information when it comes to buying a stock, is it management, growth, prospects, profitability? No, no and know the most.
Port in piece of information when buying a stock or any asset, is the price you pay that's right, even with bad management, terrible growth and bad profitability, there exists some price, possibly a negative price. That is, I pay you to own it at which every asset would be a good investment. All the other aspects of an investment would fail you if you pay the wrong price. This is the fundamental tenant of value investing and the data to back it.
Is extensive. If you still don't believe me consider what Warren Buffett said to brent ashore over dinner last night price is my due diligence. This simply a profound idea is the essence behind a margin of safety. It implies that you can still profit from an investment even after getting some bad luck. If you can get a good enough price,
Therefore, if you think the intrinsic value of a company as a hundred dollars a share, and you get a four fifty dollars, you have quite a bit of willow room for bad things to happen, such as law suits bad management, a kiley jenner, too.
He'd etc. So you can recover Dan Rasmussen.
recently wrote an incredible piece on his experience in private equity that backs this idea. Further quote, one p firm did such an
allison and found that over fifty percent of deals done at valuations of more than ten times eba lost money and that the aggregate multiple of money
was barely over one point: zero acts, that is, for every dollar invested
Slightly more than one dollar was returned to investors and quote once again hire purchase prices imply lower returns. You may be thinking that price only matters for the first few years, but over longer periods the price paid shouldn't matter
I even implied this when I previously discussed evaluations and showed how annualized real overturns converged over longer time periods for the? U s: stock market. However, my friend Jake pointed out how even small differences and annual returns can make huge dollar differences when compounded,
I looked into this further and realise that he was completely right. If you look at every thirty year period, for the u s, stock market from
eighteen. Eighty one onward you'll see that law
We're starting valuations, imply higher future dollar growth. There is a clear
negative relationship between initial thou and future dollar growth, while valuations aren't completely predictive, they do seem to matter so,
Ah, you investing must be killing it right now, right, nope, it's either underperforming or doing ok
but it depends on how you measure it, and this is why value investing, despite being arguably the
important investing rule across all time and space is also one of the most difficult ignorance is easier than catching falling knives, despite all the evidence
just gust about how much purchase price matters in investing. I still think you should move
sleep ignore this advice. If you're, an average retail investor, why buying, when things are cheap, requires you to time the market to some extent, this is difficult because you could buy when you think something is cheap and then it gets. Four
cheaper in the med faber value talk, he makes the following joke. That illustrates his point quote: what do you call a market? That's down. Ninety percent
That's a market that was down eighty percent and then proceeded to go down. Fifty percent more end quote trying to buy an investment, as its bottom mean.
One is catching a falling knife and it can be both difficult and scary. So what should you do instead of exclusively trying to buy cheap, consider the following number? One dollar cost average or, as I love to say, just keep buying. While this is not optimal mathematically, since you sometimes buy assets as inflated valuations behave early, it is by far the best solution.
I know, for the average retail investor buying consistently is an ignorant approach to mark evaluations that is far easier than catching a falling knife and number two added value till to your equity allocation.
There are lots of value. E t. Have a mutual funds out there that can give you some value exposure. I wouldn't put too much of my total equity in this, though, as value is known to go through periods of under performance which can make holding me investment difficult.
If any of this got you interested in learning more about value investing, I recommend
following books. To start the intelligent investor
benjamin, graham and decency, ze. The education of a value investor by guy spear security.
analysis by benjamin, graham and David L died and margin of safety by south carmen. This book is out of print difficult to find
currently cells for seven hundred dollars for reuse copy. Best of luck. If you find one you just listen to the post, titled a margin of safe
by nick moduli of of dollars and data dot com, I'm elite, you an android,
climb and where the hosts of built for change podcast from accenture I built for change. We're talking to business leaders from every corner of the world that are harnessing changed to reinvent the future of their business were discussing ideas like the importance of ethical ay I or how productivity sores when companies truly listen to other employees value these are inside.
leaders need to know tat they had so subject.
de built for change wherever you get your podcasts gas.
This article reminded me of a question. I see all the time from new investors their curious if they should wait for a market downturn to start investing. I think, as import.
You remember that you'll almost never win by trying to time the market and that time in the market is much more effective for building wealth.
The strategy of investing regularly, regardless of what the market is doing, is known as dollar cos.
averaging, and it reduces the impact of volatility on the overall purchase of your investments. This strand
Gee removes a much of the detail, work of attempting to time the market in order to make purchases of equities at the best prices. A great example of this
prodigy at work is with a four o one k, you're, making regular contributions from every paycheck, regardless of what the market's doing dollar
ass averaging guarantees a mathematically favourable average price for your investment, because you're buying at both the highs and lows. It also pairs well
long term. Passive investment strategy.
truly allows you to invested and forget it and that's around
for another Monday show have a great start here, weak and I'll, be back tomorrow. We're optimal life, awaits
Transcript generated on 2023-09-19.