Warren Buffett’s 3rd Rule – A Stock Must Be Stable And Understandable

The lesson focuses on Warren Buffet’s third rule, which states that a stock must be stable and understandable. The lesson has two objectives: first, to understand why stability is important in determining intrinsic value, and second, to comprehend why it is vital to invest in a company that you understand. The rule is illustrated through the examples of two people, Andrew and Linda, whose equity, earnings, and debt are tracked for the previous ten years. Andrew’s numbers have been unpredictable, whereas Linda’s have shown steady growth. The lesson emphasizes that predicting the intrinsic value of a company with volatile numbers is challenging and risky, and thus, investing in a predictable business is more advantageous. Finally, real-life companies, such as Disney and Sirius XM Radio, are analysed to show how their equity, debt, and earnings have evolved over the last decade, in order to compare the two.