Investing Rules

Two rules of investing to follow.

Warren Buffett said that the two rules of investing are: #1: Don't lose money, and #2: Don't forget rule number one. He then explained some more basics: When you buy a share do so as though you are becoming a partner in the business; Make sure you use the market to serve you, not to instruct you; And before buying be certain there is a sufficient margin of safety, a cushion of comfort between the price you are paying and the value of the company.

I want to add one more: Make sure the company can stay in business. That's sort of a corollary to part three, about the sufficient margin of safety, but it's more dramatic. And in these times, you need to figure this part out first before you begin working on all other valuation metrics.
For example, value investors look for low P/E (price to earnings) ratios, high cash positions, low debt, low price to book, preferably less than half, etc. They're looking for the margin of safety Buffett recommends.

The second important factor is access to capital. That is, the ability to raise capital when needed. Large companies with strong balance sheets can do this now, especially in the debt markets. Not so much in the equity markets. No matter how large or strong the company is at the moment, it's almost impossible to raise equity unless it's a special arrangement like a private placement or preferred stock. Common equity is not accepted because investors appetite for risk is almost zero now. They don't want just equity. They want some income (hence the preferreds have a better chance). But only companies with strong balance sheets qualify.

When looking for a specific stock the most important to analyze is cash management. A good company that exemplifies this is CommScope.