As you become more mature as an investor, you will start to appreciate why I insist on a ridiculous margin of safety whenever I start investing in a company.
Very simply, investing in stocks and shares is a high risk venture. There is risk that the company will lose money in its business. There is risk of a worldwide stock market collapse. Worse, there is risk that the management is less than honest and rather take care of themselves first before their shareholders.
You see, what may appear fundamental sound to an investor may be an illusion if the major shareholders or management would rather extract value for themselves first. They can do this in many ways.
They can use the company cash to buy unprofitable businesses and one will never know if there were side deals arranged beforehand so that the major shareholders or management will benefit financially. Side deals can be arranged in such a way that it appears that no money changes hands but instead, one party buys an unsound business from a private party, which later buys an unsound private business from the management of the first party.
Another way is for the listed company to be subjected to a reverse takeover and as part of the deal, management buys the existing undervalued business for a song. Yet another way is to encourage the share price to go south and then do a general offer as even at a high premium, management will still be able to buy the fundamentally sound company for much less than it is worth. Of course another way is simply to declare losses and get into the SGX watchlist and delist the shares. Once is the listed company is converted back to a private company, the management can gain back full control of the company and do everything else mentioned above without worry of scrutiny.
Another way of looking at it is that what may appear fundamentally sound is real to the management or major shareholders but may just be an illusion to minority shareholders. Do take some time to think about my statement above and you will then understand why I demand a ridiculous margin of safety whenever I start investing in a company as a minority shareholder.
Yes, I have personally experienced many of these situations in my life as an investor. I can now fully understand why Warren Buffett prefers buying whole businesses rather than just being a minority shareholder in any business. In the years ahead, I am likely to move in that direction as well.
A high margin of safety is a strategic approach to investing, which means you're fighting on high ground; whereas intraday scalping strategy is that, you're fighting on low ground.
"All armies prefer high ground to low and sunny places to dark — High Ground is not only more agreement and salubrious, but more convenient from a military point of view; low ground is not only damp and unhealthy, but also disadvantageous for fighting." — Sun Tzu's Art of War孫子兵法(九) - 行軍篇(上)孫子兵法(九) - 行軍篇(下)《孙子兵法》之 第九篇：如何在行军中宿营和观察敌情Sun Tzu's Art of War, Chapter 9： The Army on the March
1. The question of encamping the army, and observing signs of the enemy. Pass quickly over mountains, and keep in the neighborhood of valleys.
2. Camp in high places, facing the sun. Do not climb heights in order to fight. So much for mountain warfare.
3. After crossing a river, you should get far away from it.
4. When an invading force crosses a river in its onward march, do not advance to meet it in mid-stream. It will be best to let half the army get across, and then deliver your attack.
5. If you are anxious to fight, you should not go to meet the invader near a river which he has to cross.
6. Moor your craft higher up than the enemy, and facing the sun. Do not move up-stream to meet the enemy. So much for river warfare.
7. In crossing salt-marshes, your sole concern should be to get over them quickly, without any delay.
8. If forced to fight in a salt-marsh, you should have water and grass near you, and get your back to a clump of trees. So much for operations in salt-marches.
9. In dry, level country, take up an easily accessible position with rising ground to your right and on your rear, so that the danger may be in front, and safety lie behind. So much for campaigning in flat country.
10. These are the four useful branches of military knowledge which enabled the Yellow Emperor to vanquish four several sovereigns.11. All armies prefer high ground to low and sunny places to dark.
12. If you are careful of your men, and camp on hard ground, the army will be free from disease of every kind, and this will spell victory.
13. When you come to a hill or a bank, occupy the sunny side, with the slope on your right rear. Thus you will at once act for the benefit of your soldiers and utilize the natural advantages of the ground.
14. When, in consequence of heavy rains up-country, a river which you wish to ford is swollen and flecked with foam, you must wait until it subsides.
15. Country in which there are precipitous cliffs with torrents running between, deep natural hollows, confined places, tangled thickets, quagmires and crevasses, should be left with all possible speed and not approached.
16. While we keep away from such places, we should get the enemy to approach them; while we face them, we should let the enemy have them on his rear.
17. If in the neighborhood of your camp there should be any hilly country, ponds surrounded by aquatic grass, hollow basins filled with reeds, or woods with thick undergrowth, they must be carefully routed out and searched; for these are places where men in ambush or insidious spies are likely to be lurking.
18. When the enemy is close at hand and remains quiet, he is relying on the natural strength of his position.
19. When he keeps aloof and tries to provoke a battle, he is anxious for the other side to advance.
20. If his place of encampment is easy of access, he is tendering a bait.
21. Movement amongst the trees of a forest shows that the enemy is advancing. The appearance of a number of screens in the midst of thick grass means that the enemy wants to make us suspicious.
22. The rising of birds in their flight is the sign of an ambuscade. Startled beasts indicate that a sudden attack is coming.
23. When there is dust rising in a high column, it is the sign of chariots advancing; when the dust is low, but spread over a wide area, it betokens the approach of infantry. When it branches out in different directions, it shows that parties have been sent to collect firewood. A few clouds of dust moving to and fro signify that the army is encamping.
24. Humble words and increased preparations are signs that the enemy is about to advance. Violent language and driving forward as if to the attack are signs that he will retreat.
25. When the light chariots come out first and take up a position on the wings, it is a sign that the enemy is forming for battle.
26. Peace proposals unaccompanied by a sworn covenant indicate a plot.
27. When there is much running about and the soldiers fall into rank, it means that the critical moment has come.
28. When some are seen advancing and some retreating, it is a lure.
29. When the soldiers stand leaning on their spears, they are faint from want of food.
30. If those who are sent to draw water begin by drinking themselves, the army is suffering from thirst.
31. If the enemy sees an advantage to be gained and makes no effort to secure it, the soldiers are exhausted.
32. If birds gather on any spot, it is unoccupied. Clamor by night betokens nervousness.
33. If there is disturbance in the camp, the general's authority is weak. If the banners and flags are shifted about, sedition is afoot. If the officers are angry, it means that the men are weary.
34. When an army feeds its horses with grain and kills its cattle for food, and when the men do not hang their cooking-pots over the camp fires, showing that they will not return to their tents, you may know that they are determined to fight to the death.
35. The sight of men whispering together in small knots or speaking in subdued tones points to disaffection amongst the rank and file.
36. Too frequent rewards signify that the enemy is at the end of his resources; too many punishments betray a condition of dire distress.
37. To begin by bluster, but afterwards to take fright at the enemy's numbers, shows a supreme lack of intelligence.
38. When envoys are sent with compliments in their mouths, it is a sign that the enemy wishes for a truce.
39. If the enemy's troops march up angrily and remain facing ours for a long time without either joining battle or taking themselves off again, the situation is one that demands great vigilance and circumspection.
40. If our troops are no more in number than the enemy, that is amply sufficient; it only means that no direct attack can be made. What we can do is simply to concentrate all our available strength, keep a close watch on the enemy, and obtain reinforcements.
41. He who exercises no forethought but makes light of his opponents is sure to be captured by them.
42. If soldiers are punished before they have grown attached to you, they will not prove submissive; and, unless submissive, then will be practically useless. If, when the soldiers have become attached to you, punishments are not enforced, they will still be unless.
43. Therefore soldiers must be treated in the first instance with humanity, but kept under control by means of iron discipline. This is a certain road to victory.
44. If in training soldiers commands are habitually enforced, the army will be well-disciplined; if not, its discipline will be bad.
45. If a general shows confidence in his men but always insists on his orders being obeyed, the gain will be mutual.