In his classic text The Intelligent Investor, Benjamin Graham asserts, "Investing is most prudent when it is most businesslike." If you remember those nine words, you'll be able to answer why you're making any investment.
If you look at XYZ Corp. and say, "It's selling at $5 a share, so it's a cheap investment," you're stuck in a speculative thought process. On the other hand, if you truly understand the business, you'll be able to summarize, in three to five sentences, the most fundamental reasons for why a stock is an attractive investment at its current price.
I always try to follow Graham's thought process when I'm looking at a company. Let me give you an example.
Buying oil for 75% off
In 2003, Chinese oil company PetroChina
The Berkshire blues
Yet all too often, smart people lose a lot of money because they invest based on share price and not business value. Many of us would rather own 1,000 shares of a $10 stock than 10 shares of a $1,000 stock.
Consider the case of Berkshire Hathaway
That means you can purchase a piece of Warren Buffett's company at a substantial discount to intrinsic value, and if you buy now, according to Pabrai's estimate, you will earn above-market returns in the long run. No, you won't get the returns that Buffett generated during his 1950s Buffett Partnership years, but returns in the low to mid-teens are nothing to sneeze at when the market earns about 10% or so a year in the long run. And the best part is that your due diligence has been done for you every year since Buffett took over.
With even one share, you are getting a slice of a company with close to $100 billion of marketable securities, along with $30 billion or so in cash that's being invested by the world's greatest money manager. On top of this, you get a collection of businesses -- including NetJets, Shaw, Fruit of the Loom, Clayton Homes, and more -- that are earning money and will keep doing so for years to come. And you can own a part of this empire for only 1.5 times book value. An investing thesis doesn't get more compelling than that.
So even if you only have $10,000 to invest, know that a couple of shares of Berkshire "B" have more value than most companies that sell for much less. I won't deny that there are other smaller companies that will outperform Berkshire over the years, but unless you have the time to apply a deep level of intensity to researching investment ideas, why not give your money to the best capital allocator on the planet and one of the greatest investors ever, and let him do the work for you?
For more Foolishness, see "Warren Buffett's Priceless Investment Advice."
Fool contributor Sham Gad runs Gad Partners Fund, a value-centric investment partnership reminiscent of the 1950s Buffett Partnership. As of this writing, he has positions in Berkshire and PetroChina. You can reach him at shamMF@gmail.com. The Fool has a straightforward, intelligent disclosure policy.