gb study notes – chapter 1

Chapter 1: The Five Rules for Successful Investing

1. Do Your Homework
• “… sitting down and reading the annual report cover to cover, checking out industry competitors, and going through past financial statements [pg 2]”
• why? because you have the possibility of losing your money, you should know about your investment
• why? because you can’t always trust or rely upon opinions of others
2. Find Economic Moats
• moat – A deep wide ditch, usually filled with water, typically surrounding a fortified medieval town, fortress, or castle as a protection against assault [Answers.com]
• economic moat – the ability of a company to keep “competitors from attacking a firm’s profits”, to protect its profits from the assault of competitors
• the term economic moat was popularized by Warren Buffett
• An Important Concept: Typically in a free market, a profitable company will attract competition that will eventually erode the company’s profits.
• The Key Question: “How does a company manage to keep competitors at bay and earn consistently fat profits? [pg 3]”
• Related Websites:
1. A Look at Economic Moats – Investopedia
2. Digging an Economic Moat – Morningstar (Pat Dorsey)
3. How Morningstar Measures Motes – Morningstar
4. Companies with Wide Economic Moats – Street Authority
5. An Introduction to Economic Moats – Yahoo (Pat Dorsey)
3. Have a Margin of Safety
4. Hold for the Long Haul
5. Know When to Sale