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When Do I Buy a Stock Exactly - the Way Warren Buffet Knows When to Buy a Stock - YouTube
Channel: Learn to Invest - Investors Grow
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Hi I'm Jimmy in this video.
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I'm going to walk through how we can identify
exactly when to buy a stock.
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I believe that many investors often ask themselves
they say to themselves you know I really like
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this company but when do I buy this stock
or this bond or whatever the investment may be.
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My goal with this video is to give a reliable
method for identifying the when we should
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buy a stock.
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And I'm going to use previous research videos
that I've done videos where I've talked about
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an analysis to illustrate how we could have
applied this method if we ever were interested
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in buying one of those companies.
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So our first step is to pick a company that
we know and one that we want to own one that
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we like. So I've got three examples.
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I'm going to use three different companies
that I've previously made videos on Apple
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Disney and J.P. Morgan.
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But this would work for pretty much any of
the research videos that I've put up or any
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of the companies that you've researched.
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So let me lay the groundwork real quick.
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Well I did the apple video back in September
of last year and the price is about 220 and
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I used a forward PE valuation and we made
the case that the fair value of the stock
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was about two hundred and forty dollars.
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At that time with Disney we researched that
one back in October.
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The stock was about 115 at the time and I
made the case to the fair value the stock
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should be about one hundred twenty two dollars
per share and with Disney stock we use a discounted
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cash flow technique and then jumping over
to JP Morgan.
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Well here we use price to tangible book value
to value the stock.
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The stock was at about 103 at the time and
we made the case that it should be worth about
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one hundred and ten dollars per share.
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Now I'm using these three examples because
in each of these cases where we use a different
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valuation technique to try to determine the
fair value of a stock.
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Now I want to point something out.
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I always try to use the term fair value and
not price target.
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Oftentimes you may hear analysts say Oh the
price target is this or the price target is
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that or the target price whatever they might
say.
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And although they pretty much mean the exact
same thing I'm a big fan of the concept of
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fair value instead mostly because I believe
in long term investing.
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And I feel like price target implies that
we're somehow going to jump out of that stock
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or that company that we've invested in once
it reaches that price. OK.
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So that being said clearly after we pick the
company that we like our next step is to come
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up with the fair value of that stock.
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So I'm going to be doing a whole series of
videos on how to come up the fair value of
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stocks. The first one is going to be on the discounted
cash flow method.
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That's my personal favorite. That one's going to be coming out soon.
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But then I plan on doing a whole series of
videos on many different ways to come up with
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a fair value of stocks and then maybe at the
end we'll try to hit some ways to value bonds.
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OK so step one find the company step to research
it and come up with a fair value.
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Now once we come up the fair value and this
is key we need to try to be honest with ourselves
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as to our level of confidence with our calculation
of the fair value.
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So with the Disney pick as an example I would
classify after the research I had done that
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I was highly I would classify that one as
highly confident with the J.P. Morgan one
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I would say was close not quite as high as
Disney.
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But I'll say pretty confident or a fairly
confident with the apple one I was probably
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a little less confident.
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Now that might have to do with the fact that
I like this kind of cash flow which I used
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for Disney and I and price to tangible book
value which is what I use for J.P. Morgan.
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I like those two methods and they apply very
well to that situation.
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I used PE for Apple and price to earnings.
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To me it's among the weaker valuation techniques.
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So I was okay with it but I wasn't thrilled
with it.
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I think there's just a little bit more room
for error with that type of valuation.
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Okay. So now that we know how confident we are in
our calculation of fair value now it's time
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for us to apply a margin of safety to that
fair value.
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Now this is the key to the question When do
I buy a stock.
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So each of us should set our own margin of
safety requirements based on our own risk
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profiles.
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But for me I'm going to say that I'm very
confident my analysis that I'm going to apply
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a margin of safety of let's say 15 percent
if I'm fairly confident that I'm going to
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apply margin of safety of 20 percent and if
it lands in the somewhat confident bucket
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I'm going to call it 25 percent.
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Clearly the more risk that you see in it or
the less confident you are the higher the
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margin of safety should be.
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Then if there's a company that I'm not confident
at all in or I don't like my calculation at
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all I'm just going to skip that.
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That's the beautiful part to investing is
you could just move on to the next company.
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There is tons of good companies out there.
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Okay.
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So using Disney back in the day we did the
research.
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The stock was trading at about one hundred
fifteen dollars a share.
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Well I believe that the fair value at that
time was one hundred twenty two dollars per
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share.
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So when we buy Disney we wanted to be with
a 15 percent margin of safety below our calculated
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fair value.
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So if we multiply 122 times point eight five
a concert 15 percent.
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We get one hundred and four dollars a share.
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Now this is a chart of what Disney looks like
on the day we created where at the very end
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the day we created the video.
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That was when the research was done.
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So as we could see Disney stock needed to
get all the way back to this level before
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we'd meet our margin of safety requirements.
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But that's OK.
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That would do the same thing for J.P. Morgan.
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Well we apply our 20 percent margin of safety
to our fair.
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Our calculated fair value which was one hundred
ten dollars and we need to enter at about
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88 dollars per share.
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Well the stock.
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Morgan stock hadn't been at eighty eight dollars
per share in the entire year leading up to
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when we did our research.
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Now jumping over to Apple now we want to apply
a 25 percent margin of safety to our fair
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value calculation of two hundred forty dollars
a share and that means we want to enter at
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about 180 dollars.
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So this is apples chart.
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And as we could see optimism was pretty high
the stock was moving higher.
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So it was a reasonable chance at the time
to believe it might never get back down to
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that level.
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But that's OK.
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So after we finish all of our research I believe
it makes sense to put together a table like
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this.
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This simply maps out the day we did the analysis
our calculated fair value our margin of safety
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and our ideal entry point.
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And this finally gives us the answer to the
question When do I buy a stock.
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It's really as simple as wait for it to get
below our levels.
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Now one word of caution and that is that it
can take a long time for stocks to get to
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our ideal entry point if they ever get there.
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So we need to keep our research up to date.
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So let's look at Disney as an example.
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So with Disney we used a discounted cash flow
valuation and our anticipated cash flow for
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2018 was 9720.
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And the actual free cash flow for that year
came in at ninety 9830.
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So it came in better than expected.
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Now this is no we want to look at this is
just one illustration of it but we also want
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to check the news check the new company filings
see if projections had changed any.
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Basically we want to challenge our own investment
thesis to see if it's still in play and assuming
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it is still in play we can keep waiting.
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Okay.
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So this is an updated chart of Disney and
this is where we did our research and this
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is the way the stock would have played out
and thanks to the pullback that happened for
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the stock market the end of 2018.
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Well Disney would have had hit our entry price.
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Okay now switching over to Apple even with
our 25 percent margin of safety we would have
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had an opportunity to buy Apple there is that
when we first enter research.
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Here's where the stock is now and here's our
entry level.
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And we would have done quite well with both
of these stocks had we been disciplined with
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our approach.
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But what about J.P. Morgan.
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Well here it never quite got to where we wanted
to buy it.
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And I'm fine with that even though I'm a huge
fan of JP Morgan but I'm a big fan at the
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right price.
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So the more stocks that we research the longer
this list is going to get for us and the more
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opportunities will eventually come our way.
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Now as I finish up the Dow 30 analysis I plan
on putting together a table just like this
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for all 30 companies mapping out our ideal
entry points as of when we do the build the
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different portfolios and I recommend that
each of us have our own list just like this.
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Applying our own personal level of margin
of safety to each stock that we research and
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the ones that we are considering and investing
in.
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So as you may have noticed the real answer
to the question When do I buy a stock can
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really be where do I buy the stock.
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Once you find that level well then it's just
a matter of sitting watching the fundamentals
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and waiting for it to get to your level.
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So that is how I do it.
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But how do you do it do you do it the same
way.
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Does this way make sense to you.
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Do you have any questions that I didn't fully
cover.
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I didn't explain well enough in this video
outside of.
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How do you come up with a fair value because
like I said I'm going to come up with a whole
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slew of videos covering that exact topic.
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You haven't done so yet hit subscribe so you
can get those videos when they come up.
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Now another question I would have for you
is what is your personal level of margin of
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safety.
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Do you have one.
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Because I have found that that can vary pretty
wildly from invested invested.
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So thank you for stick with me all the way
into the videos for any questions or comments
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please put them in the comments below.
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You haven't done so hit subscribe and I'll
see in the next video.
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Thanks.
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