Master Achievement

Once you have made the transaction of entering a trade, you have no say in what happens next.  For example, once you purchase 100 shares of Google, the market and company management will determine what happens to your stock.  Investing boils down to one assessment that you can control: the price you are willing to pay to enter a position.

 

This goes for any passive investment you make: stocks, bonds, options, futures, you name it.  Not only is the price you pay the only thing you control, but it will also determine your return.  In investing, tilting the price you pay in your favor is the best you can do. 

 

For example, buying low price to book stocks has been proven to make average returns above 20% as the stock price increases to book value or higher over time.  The most popular phase is investing with a margin of safety.  This is were you only invest in a security when it has a 30-50% margin of safety meaning it is at one-third to one-half on its true market value.

 

If you buy a $20 stock selling at one-half of book value, then you are actually paying about $0.50 on a dollar of what the stock is actually worth in the market.  Over time, the market will realize this mispricing and revert towards the true market price around $40 in this example.

 

To accomplish the best investing returns using this strategy, the investor must be patient.  The investor must wait until the desire price has decreased to the point of creating a margin of safety.  This is the greatest attribute of Warren Buffett.  He has the ability to wait until the stock he wants to purchase drops to his price.

 

Your return on investment is determined by the price you pay for the purchased security.  The lower the price paid, the better the expected return.  This is often referred to as waiting for the fat pitch before you swing for the fences. 

In investing, the most important decision is the price you are willing to pay to purchase the security!