As a general rule in investing, the devil is not in the details. Rather, the most important thing is to have a large margin of safety.

Margin of Safety: MOS

I base my valuation calculations on a few pretty robust variables that I have a direct understanding of, such as stable and reliable patterns in sales growth and Price/Sales multiples.

Then I wait for a “fat pitch”, i.e., a really great investment opportunity, with a high probability of a huge annual return.

There is no reason to go after just 10-15% annual returns by assuming the risks associated with single stock investments. Especially not if the analysis and investment case is dependent on precise assumptions, forecasts and calculations of competition, demand and profitability, that you have no clear reason for assuming company clients or the market will fulfill. Further, you should demand at least 20% annualized returns for taking on single stock equity risk.

Beware of the DCF

In particular I’d like to warn against using DCF calculations with a low (below 10-15%) and precise discount rate, not to mention a high cash flow growth rate (higher than nominal GDP growth plus 1-2%-points) after years 5-10.

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In The Investing Course we will teach you how to value stocks and arrive at a margin of safety. This can be done through a bunch of ways. You have to learn the various ways of valuation, and then see when the discrepancy between your stock and another stock is too wide. But sometime relative valuation is worthless and you need to rely on fundamental analysis and really understand the business.

You May Also Want to Read:

• When is a Stock Cheap?
• How to Find New Stocks