1. "Think of shareholders (investors) as owner-partners."
2. "We eat our own cooking." All managers and directors should ideally have a stake in the business and benefit from the company's success.
3. The "goal is to maximize the average annual rate of gain in intrinsic business value on a per-share basis." You want to invest "businesses that generate cash and consistently earn above-average returns on capital".
4. You should "rarely use much debt and, when you do, attempt to structure it on a long-term fixed rate basis. One should reject interesting opportunities rather than over-leverage our balance sheet." (Leverage magnifies BOTH, gains and losses. That is not to say, by any means, that small amounts of debt on GOOD TERMS are to be entirely shunned.)
5. "We react with great caution to suggestions that our poor businesses can be restored to satisfactory profitability by major capital expenditures. (The projections will be dazzling - the advocates will be sincere - but, in the end, major additional investment in a terrible industry usually is about as rewarding as struggling in quicksand.)"
Recall that "Turnarounds seldom turn (W. E. Buffett)," and there is usually a tendency to compare incorrectly (M. Mauboussin). If the industry is struggling, it is unlikely managerial magic will ever be able to turn a business with poor underlying economics into a successful company.
6. "We also believe candor benefits us as managers: the CEO who misleads others in public may eventually mislead himself in private."
7. "One question I always ask myself in appraising a business is how I would like, assuming I had ample capital and skilled personnel, to compete with it." This gives you a measure of the company's market share, moat, and the nature of competition in this industry.
8. The "ideal business" is one that is "built upon exceptional value to the customer that in turn translates into exceptional economics for its owners." Consumer trends matter, and at the end of the day, businesses are designed to serve customers. Amazon, for example, owes some of its success to its goal of being the "most customer-centric company" in the world.
9. "We never take the one-year figure very seriously. After all, why should the time required for a planet to circle the sun synchronize precisely with the time required for business actions to pay off? Instead, we recommend not less than a five-year test as a rough yardstick of economic performance."
Long-term views are best - it is nearly impossible to predict what will happen in the next year (indeed, any forecasts will say more about the forecaster than the future). By contrast, it is easier to see what the situation may be like in 5 to 10 years. This requires imagination, and the acceptance that there is no surety. You can only speculate - But you must speculate with an edge.
10. "So, also, do businesses having equal financial input end up with wide variations in value." What (money) you put in (Book Value) doesn't necessarily have a specific output (Intrinsic Value).
11. "The difficulty lies not in the new ideas but in escaping from the old ones." "Be actively open-minded," and change your opinions when the facts change. This is difficult- that is what makes it essential.
12. "Some (investments) will disappoint us, others will deliver pleasant surprises." Remember this is an uncertain business, and that you can only attempt to find good quality companies which have a share price below your estimation of intrinsic value. After that, its (largely) out of your control. You must be prepared to lose money to make money.
13. "In candy, as in stocks, price and value can differ; price is what you give, value is what you get." As Vinod Nair and Arun Agarwal at Altavista Capital say, you are looking for simple, "good quality businesses with a margin of safety." (Think about expectations versus fundamentals, or second level thinking.)
14. Market Activity:
Essentially, you don't want to trade. Would you rather buy a company's shares and hold them as they rise from 10 to 40, pay 2 for your transactions, and make 28, or buy at 10, sell at 20, then buy at 30, and sell at 40, and then pay 4 for the trades, making only 16? Indeed, if you are just to buy and sell, you are being taxed-by the brokers instead of the government.
You want to buy good companies' shares cheap, and hold on to them for as long as possible.
2. "We eat our own cooking." All managers and directors should ideally have a stake in the business and benefit from the company's success.
3. The "goal is to maximize the average annual rate of gain in intrinsic business value on a per-share basis." You want to invest "businesses that generate cash and consistently earn above-average returns on capital".
4. You should "rarely use much debt and, when you do, attempt to structure it on a long-term fixed rate basis. One should reject interesting opportunities rather than over-leverage our balance sheet." (Leverage magnifies BOTH, gains and losses. That is not to say, by any means, that small amounts of debt on GOOD TERMS are to be entirely shunned.)
5. "We react with great caution to suggestions that our poor businesses can be restored to satisfactory profitability by major capital expenditures. (The projections will be dazzling - the advocates will be sincere - but, in the end, major additional investment in a terrible industry usually is about as rewarding as struggling in quicksand.)"
Recall that "Turnarounds seldom turn (W. E. Buffett)," and there is usually a tendency to compare incorrectly (M. Mauboussin). If the industry is struggling, it is unlikely managerial magic will ever be able to turn a business with poor underlying economics into a successful company.
6. "We also believe candor benefits us as managers: the CEO who misleads others in public may eventually mislead himself in private."
7. "One question I always ask myself in appraising a business is how I would like, assuming I had ample capital and skilled personnel, to compete with it." This gives you a measure of the company's market share, moat, and the nature of competition in this industry.
8. The "ideal business" is one that is "built upon exceptional value to the customer that in turn translates into exceptional economics for its owners." Consumer trends matter, and at the end of the day, businesses are designed to serve customers. Amazon, for example, owes some of its success to its goal of being the "most customer-centric company" in the world.
9. "We never take the one-year figure very seriously. After all, why should the time required for a planet to circle the sun synchronize precisely with the time required for business actions to pay off? Instead, we recommend not less than a five-year test as a rough yardstick of economic performance."
Long-term views are best - it is nearly impossible to predict what will happen in the next year (indeed, any forecasts will say more about the forecaster than the future). By contrast, it is easier to see what the situation may be like in 5 to 10 years. This requires imagination, and the acceptance that there is no surety. You can only speculate - But you must speculate with an edge.
10. "So, also, do businesses having equal financial input end up with wide variations in value." What (money) you put in (Book Value) doesn't necessarily have a specific output (Intrinsic Value).
11. "The difficulty lies not in the new ideas but in escaping from the old ones." "Be actively open-minded," and change your opinions when the facts change. This is difficult- that is what makes it essential.
12. "Some (investments) will disappoint us, others will deliver pleasant surprises." Remember this is an uncertain business, and that you can only attempt to find good quality companies which have a share price below your estimation of intrinsic value. After that, its (largely) out of your control. You must be prepared to lose money to make money.
13. "In candy, as in stocks, price and value can differ; price is what you give, value is what you get." As Vinod Nair and Arun Agarwal at Altavista Capital say, you are looking for simple, "good quality businesses with a margin of safety." (Think about expectations versus fundamentals, or second level thinking.)
14. Market Activity:
"Brokers, using terms such as 'marketability' and 'liquidity', sing the praises of companies with high share turnover (those who cannot fill your pocket will confidently fill your ear). But investors should understand that what is good for the croupier is not good for the customer. A hyperactive stock market is the pickpocket of enterprise."
"By market activity, investors can impose upon themselves the equivalent of such a tax."
Essentially, you don't want to trade. Would you rather buy a company's shares and hold them as they rise from 10 to 40, pay 2 for your transactions, and make 28, or buy at 10, sell at 20, then buy at 30, and sell at 40, and then pay 4 for the trades, making only 16? Indeed, if you are just to buy and sell, you are being taxed-by the brokers instead of the government.
You want to buy good companies' shares cheap, and hold on to them for as long as possible.
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