20. Warren Buffett’s 3rd rule – A stock must be stable and understandable

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In this lesson, students learned the importance of stability. The most important reason why we must pick a stable stock is because we’re unable to accurately predict the growth of the earnings without stability. If a company has an unstable past, it is possible that their future will become stable – it’s just less likely than a company that’s already demonstrated those attributes. I like to think that companies perform and act like individual people you might know. Some people are very conservative and grow their assets at a nice and controlled pace. Others do not. As you look at that example, it becomes obvious that the person that manages their finances conservatively will be easier to predict future performance. This is very important as we move to the next lesson and learn to calculate the intrinsic value of a stock.

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