 Good day, fellow investors. Welcome to the summary of the margin of safety, set clearments only an already legendary book. We already summarized the intelligent investor, so we are continuing with our value investing book summaries with the goal of creating a strong investment mindset. As Buffett would say, investment character is what means the most when it comes to investing and achieving significant returns. So by looking at the margin of safety we hope to lower our risk and increase our returns. The title of the first chapter is where most investors stumble and the topics are investing versus speculation, trading sardines versus eating sardines, the greater full strategy, difference between investment and speculation, successful and unsuccessful investors, is the market efficient or irrational, unsuccessful investors and their costly emotions and the successful investment formula. The book starts with the most important thing an investor should keep in mind. Investors believe that over the long run, security prices tend to reflect fundamental developments involving the underlying businesses. There are three ways an investor expects to profit, from the free cash flow that will be reflected in an increase of the stock price or dividends, from an increase in the multiple investors are willing to pay for the business and from the narrowing of the gap between the stock's price and the higher business value. Speculators on the other hand buy or sell stocks based on where they think the price will go. Claremont is clear on technical analysis and stock market prediction of any kind as he states that trying to predict anything related to prices is a waste of time. Claremont's mission is to show that investors have a reasonable chance of achieving long-term investment success. Speculators by contrast are likely to lose money over time. In this series of videos, we will learn or better to say refresh our memory on how to be investors. And the book shares a very interesting analogy how in California sardines were missing in the Monterey area or wherever they are caught and the price of sardines went up. So traders were trading a lot of sardine cans. One trader took a can, opened it and tried the sardine and it was awful. It went sour and he said oh this is not good for eating and the other trader said to him oh those sardines are not for eating those sardines are for trading. Which is a perfect analogy on what the stock market can be sometimes where it's all about trading and nobody looks at the underlying value. It's often euphorical so it's often like 1999 it's often like the housing bubble in 2006-07. So when stock prices diverge from underlying fundamentals it becomes dangerous and that's what value investors keep reminding the world even if the world will not listen. Most investors, most speculators focus on the greater full strategy and here we have a chart of micron technology and one comment that we received on the channel said how one investor just got burned by investing in micron and he's now looking to invest his money in oil. So this is a person that certainly didn't invest into fundamentals because when the stock goes down of something and you invest in fundamentals you're happy when the stock price declines. You do not sell a stock because the market is selling so that's the difference between speculators and investors. A funny note here micron technology said Claremont owned 5% of the company bought somewhere in 2013 when the stock price was around 10 and he sold when the stock price was around 13 2015. So said Claremont also owned this company so he saw value in this company when the stock price was around 10. Very interesting. So we'll see if he opens a position again or he stays away from this. He's certainly following. So even if the book was written in 1991 it is an investing evergreen and what has been written then can be perfectly applied today. Since many of today's market participants are speculators and not investors business fundamentals are not necessarily a limiting factor in securities pricing. The resulting propensity of the stock market to periodically become and remain overvalued is all the more reason for fundamental investors to be careful avoiding any overpriced investments that will require selling to another even greater full. Another example Claremont gives are disc drive manufacturers in 1983 that had a cumulative market capitalization value of 5 billion while a Harvard Business School study entitled Capital Markets Myopia so same old same old calculated that nothing could justify their market capitalization from a business perspective. Today we don't have to go far to find similar examples. The top five marijuana stocks have market capitalization of 30 billion. Needless to say none of them is remotely profitable and we have no idea which one will be profitable in the future. So it's all a greater full strategy not something what value investors do. However the successful Bitcoin investors over the last year are probably chasing gains now in the marijuana sector. Another comment nice comment is the bond market as it is another big source of speculation and according to Claremont the average holding period of the 10 year treasury is low and behold 20 days. So so long long term investment in treasuries it's all about trading. There is one simple difference between investment and speculation investments create cash for the owners. Speculations don't art collectibles rare coins are speculations being investor you will be well off in life. The difference between successful and unsuccessful investors to be a successful investor you have to be unemotional. This will allow you to take advantage of the greed and fear of others by demonstrating caution in fraughty markets and conviction in panicky markets. As to quote Claremont indeed the very way an investor views the market and its price fluctuations is a key factor in his or her ultimate investment success or failure. Then comes the question whether the market is efficient or irrational especially in the 1990s it was a big thing there were the academics saying that every investment is fully priced fairly priced because it comprehends all the information out there in the market and then on the other hand you have behavioral finance you had value investors you had Warren Buffett saying that the markets aren't efficient because they have been beating and they are still beating the market over the long term. So it's nice to see Claremont's take on this. Claremont of course he follows Benjamin Graham he introduces Mr. Market and I am putting this into a contemporary perspective my favorite chart to use and explain Mr. Market is Apple the largest market capitalization on the planet. Just a few years ago 2014 we were trading at 80 then we were trading at 113 in 2015 at 19 2016 and 2010 in 2018 and now as I took this snapshot it was at 177 perhaps even lower now with lower iPhone sales. However given Apple's size doesn't this seem irrational both on the upside and both on the downside. Value investors take advantage of Mr. Market's attitude that is throwing off prices every day. Sometimes it gives you bargains like Apple at 90 sometimes it wants a lot of money for the same thing like Apple at 2020. The wrong thing to do is to look at Mr. Market for guidance. He knows nothing according to said Claremont thus markets are not efficient and if you think this is efficient well I don't think this is efficient I think it's completely irrational and we can take advantage of that. Let me know with the comments if you think it's efficient or not. How to differentiate between rational investments and irrational investments the key is to forget about what the market is doing and focus on the business. What is the business doing? Apple's earnings didn't change that much over the last few years but the stock price changed extremely a lot. So that's how you focus you look at the business when you're happy with the business return with the business value you invest and then if the markets decides to pay you a lot for what you own the value you own you sell and you make a nice gain. Claremont says prices go up and down for two reasons they can affect the business reality or due to supply and demand business reality can be impacted by strong earnings interest rates or an acquisition supply and demand can be impacted by the market sentiment which leads us to unsuccessful investors and their costly emotions as high levels of greed sometimes cause new era thinking to be introduced in the market to justify buying or holding overvalued securities same old story same old story we are in a new era of permanently low interest rates and then Claremont finishes the chapter with a successful investment formula I constantly get questions from people especially engineers they want the investment formula what to put return on invested capital price to book P ratio what is the perfect investment formula and how do I get to my investments and here I'm using Claremont to help me there is no perfect investment formula look at the business look at what's the business delivering at its future potential if you're happy owning that business you invest and accept to get the returns from that great business what the market price earnings ratio all those parameters are pricing are market valuations is what the market is telling you about the business you have to focus on the business and what the business is telling you about the investment not what the market is telling you about the business with the price earnings ratio and that's the complete difference between value investors focused on businesses and investors focused on what the market is telling you price earnings price to book price price so that's what the market is telling you about the business, not the actual value of the business. So we'll continue with Seth Claremont's margin of safety with the summary of it. If you enjoyed it, please give a thumbs up, subscribe, click that notification bell, leave your comments if you have any questions and I'll see you in the next video.