Keynes wrote: “One’s knowledge and experience are definitely limited and there are seldom more then two or three enterprises at any given time in which I personally feel myself entitled to put my full confidence”.
Probability theory is a very important and respectable branch of mathematics and it is essential to Buffet’s theory of investment: Take the probability of a loss times the amount of possible loss from the probability of gain times the amount of possible gain. That’s what we’re trying to do. It’s imperfect, but that’s what its all about.
In Buffet’s view, investment students need only two courses (“well-taught”, naturally): how to value a business and how to think about market prices.
Buffet says firmly that “if you aren’t willing to own a stock for 10 years don’t even think about holding it for 10 minutes. Buffet adds that lethargy bordering on the sloth remains the cornerstone of our investment style.” In one year, for instance, Buffet neither bought or sold a share in five of its six major holdings. That is the final building block of his investment strategy. If you can’t find anything worth buying, don’t.
Only make investments that are within your own area of knowledge.
Regard the buying of a share as if you were buying the whole company.
Graham’s central teaching: that the “intrinsic value” of a company could be worked out quite accurately, and that it’s stock should only be purchased when its price was below the calculated value. The degree of that undervaluation he termed the “margin of safety”
Do not allow investment advisors to persuade you that investment is a complex matter needing great expertise. Instead, learn how to assess the fundamental and financial values of a business yourself, and invest according to your convictions.
Buffet has “observed that many acquisition hungry managers were apparently mesmerised vy their childhood reading of the story about the frog-kissing princess”
…He explains the difference with a simple analogy. Two children go to university. The book value of their education – the amount spent on fees, and so on - is identical. “But the present value of the future pay-off (the intrinsic value of the business) might vary enormously – from zero to many times the cost of education. The accountants measure only the first of these figures, although the second is far more important in assessing the worth of an enterprise.
Buffet notes that these businesses still typically observe “the 40-year ritual” of amortising, or writing-off, the goodwill; “the adrenalin so capitalised”, he says acidly, “remains on the books as an “asset” as if the acquisition had been a sensible one.”
Buffet is a follower of the great Cambridge economist and investor John Maynard Keynes, who seldom invested at any one time in more than two or three companies in which he had full confidence.
Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive that energy devoted to fixing leaks.
Be ruthless in analysing your success as you are when analysing your failure.
If you have done your homework thoroughly, have the courage of your convictions.
A lot of people start out with 400 horsepower motors but only get a hundred horsepower of output. It’s better to have a 200 horsepower motor and to get it all into output.
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