CHAPTER 5

Understanding the Business

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The value investing model begins with a fundamental question: do I understand it? The question stems from our recognition of stock as nothing less than an ownership stake in a business. So what we want to understand, specifically, is the business.

To understand a business is to be able to describe it in a single, unambiguous sentence. I call it an understanding statement. It’s written in simple language that anyone can understand. Here’s one for Wal-Mart:

The company is the world’s largest retailer, rushing value-priced merchandise like groceries to lower-income consumers through a chain of large stores ...

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