In 1994, he penned down a note which is reproduced below.
Factors needed to make money in the stock market
1) Price is the most important factor to use in relation to value.
2) Try to establish the value of the company. Remember than a share of stock represents a part of a business and is not just a piece of paper.
3) Use book value as a starting point to try and establish the value of the enterprise. Be sure that debt does not equal 100% of the equity.
4) Be patient. Stocks don’t go up immediately.
5) Don’t buy on tips or for a quick move. Let the professionals do that, if they can. Don’t sell on bad news.
6) Don’t be afraid to be a loner but be sure that you are correct in your judgment. You can’t be 100% certain but try to look for weaknesses in your thinking. Buy on a scale and sell on a scale up.
7) Have the courage of your convictions once you have made a decision.
8) Have a philosophy of investment and try to follow it. The above is a way that I’ve found successful.
9) Don’t be in too much of a hurry to sell.
(He bought Lehman Brothers below book shortly after it went public in 1994 and made 75% on it in a few months. Unfortunately for him, the stock went on to triple in price. Ditto with cement company Southdown. He bought it at $12½ and sold it at $28-30 within 2 years. It soon climbed to $70.)
If the stock reaches a price that you think is a fair one, then you can sell. But often because a stock goes up say 50%, people say sell it and button up your profit. Before selling try to reevaluate the company again and see where the stock sells in relation to its book value. Be aware of the level of the stock market. Are yields low and PE ratios high? Is the stock market historically high? Are people very optimistic?
10) When buying a stock, I find it very helpful to buy near the low of the past few years. A stock may go as high as $125 and then decline to $60 and you think it is attractive. But if 3 years ago the stock sold at $20, it shows that there is some vulnerability in it.
11) Try to buy assets at a discount than to buy earnings. Earnings can change dramatically in a short time. Usually assets change slowly. One has to know much more about a company if one buys earnings.
12) Listen to suggestions of people you respect. This does not mean you have to accept them.
13) Try not to let your emotions affect your judgment. Fear and greed are probably the worst emotions to have in connection with the purchase and sale of stocks.
14) Remember compounding. If you can make 12% in a year and reinvest the money back, you will double your money in 6 years.
15) Prefer stocks over bonds. Bonds will limit your gains and inflation will reduce your purchasing power.
16) Be careful of leverage. It can go against you.
