There is no single secret. But one important key is to focus on the fundamental question of what return you can expect, and not on whether the company is undervalued or overvalued according to some theoretical model. This, in the end, determines whether an investment is going to be successful or not. In the 2002 annual report of Berkshire Hathaway for the first time, Buffett actually made this clear instead of just hinting at it. He wrote, "Unless we see a very high probability of at least 10% pre-tax returns, we will sit on the sidelines.?
In other words, Buffett is focussing on expected return, not whether the company is undervalued or overvalued.
In the setting of Conscious Investor, this translates into asking for a target price TARGD which will supply at least a 10 percent return under a high margin of safety. Just as for Buffett, this establishes a worst case return with a high level of probability. In the jargon of hedging, it protects the downside.
At the same time, things could go much better than this worst case, so that the possibility of higher returns is fully available. Again, using jargon, it leaves open an unlimited upside.
By aiming at 10 percent with a high margin of safety and seeking companies with favorable potential, Buffett has achieved average returns of 20 percent and higher for year after year.
