A. Mr. Market
Imagine market quotations coming from a guy named Mr. Market who appears daily and mentions the price that he wants to buy or sell but the fellow has a emotional problem. At time he feels euphoric and names a high buy price and at other times he names a low price because he is depressed of the trouble in the world. Best part is he doesn't mind being ignored. Mr. Market is there to serve you not guide you.
At Berkshire, we intend to buy when it's low and not to sell but hold indefinitely because we are holding great businesses that will grow. There should be a rejoice when market decline because you are going to buy more of the companies that you love.
B. Arbitrage
To evaluate arbitrage you must answer 4 questions.
1. How likely is that the promised event indeed will occur?
2. How long will your money be tied up?
3. What chance is there that something still better will transpire?
4. What will happen if the event does not take place?
We participate only in transactions that have been publicly announced. Not on rumors. Arbitrage positions are a substitute for short term cash equivalent.
C. Debunking Standard Dogma
An investor cannot obtain superior profits from stocks simply by committing to specific investment style. It's too hard to make smart decisions so we decided to stick down to one good idea a year. Many telling that small investors can't beat the big players but this is wrong.
D. "Value" Investing a Redundancy
Our goal is to find an outstanding business at sensible price with also talented managers. Controlled company offers 2 advantages: first, we get to allocate capital and second is taxes where Berkshire absorbs some significant tax costs. Even securities we choose it to be:
1. We can understand
2. Favorable long term prospects
3. Operated by honest and competent people
4. Available at a very attractive price
We always try to stick to a business that we understand with margin of safety.
E. Intelligent Investing
Inactivity is an intelligent behavior. If you follow the rules then all you have to do is monitor whether the Principles are intact. We favor businesses and industries that will not have a major change. Loss of focus is what worries us most. Correctly evaluate businesses by following the four rules stated earlier.
F. Cigar Butts and The Institutional Imperative
First mistake was buying Berkshire as it was very cheap. For some time you can reap the profit as a last puff but not if it is in the long term without any annual return. Time is the friend of wonderful business and not the mediocre. Even great managers will struggle in poor businesses. After years of experience we have learned how to avoid problems instead of learning how to solve them. After some mistakes, I have learned to go into business with whom I like, trust and admire. Some other mistakes including the investments that I failed to make.
G. Life and Debt
We are not interested in incurring any significant debt at Berkshire for acquisitions or operating purposes. Hundreds of thousands of investors have a large portion of their net worth in Berkshire and a disaster for the company will be a disaster for them too. Some people do get rich with borrowed money and that's also a way to get very poor. We will hold at least $10 billion of cash for our utility businesses and $20 billion for unprecedented insurance losses. During financial chaos we will be able to pay offense while others scramble for survival. That's what allowed us to invest $15.6 billion in 25 days during Lehman bankruptcy in 2008.
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