Is value investing really hard? If you think it’s hard, you probably haven’t understood the three cornerstones of value investing. These three cornerstones are precisely the basic investment principles of value investing. They are business thinking, margin of safety, and Mr. Market. Once you truly understand and apply these three investment principles to make money, you’ll feel that value investing is not hard at all.

Essentially, these three investment principles are just common sense in doing business.

First, with business thinking, you know what you’re buying. Does it have value?

Second, if it has value, how much is it actually worth?

Third, although this thing is worth that price, can you get it cheaper? After all, nobody’s money falls from the sky.

An example will make it clear.

A small distillery is for sale, asking 1 million. Before deciding to buy it, you would usually consider three questions.

First, determine whether this business can be done. Liquor certainly has value. Why? It’s something left by our ancestors, over 2,000 years. If it had no value, it would have disappeared long ago. From a historical perspective, the liquor business can be done. If you run it carefully, it can last for many years. This is business thinking.

Second, roughly how much is this distillery worth? You would calculate, based on the distillery’s annual net profit, how many years it takes to recoup your investment. For example, if this distillery currently earns 120,000 a year, then theoretically it takes about 8 years to recoup. Generally speaking, a business that can recoup within 10 years is not bad. The question is: Can this distillery earn 120,000 every year from now on? Not necessarily. Like farming, there are good harvests and poor harvests. After calculating back and forth, you finally price this distillery at 800,000. That’s valuation.

Third, the good business is there, the valuation is there. Can you buy it cheap? Now you have a bottom line in mind: 800,000, no more. You definitely won’t buy at 1 million, because it’s indeed a bit expensive. You probably won’t buy at 780,000 either, because you’re not getting much of a bargain. You will definitely buy at 400,000, because that price is 50% cheaper than your expected price. How much cheaper here is what Buffett often calls the margin of safety.

The distillery owner sees that 1 million won’t sell, so he lowers it to 780,000. Although more people look, still no one bids. Finally, it sells at 400,000. From 1 million to 780,000 to 400,000, this owner is Mr. Market.

Knowing what you’re buying and how much it’s worth—that’s business thinking. Knowing the lowest price at which this business can be bought—that depends on your margin of safety. Of course, this requires Mr. Market’s cooperation. But the most important thing is patient waiting. When the opportunity appears, seize it tightly. Understand these three cornerstones of investing—business thinking, margin of safety, and Mr. Market—and investing becomes very easy!

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