Fashionable compensation plans

It has become fashionable at public companies to describe almost every compensation plan as aligning the interests of management with those of shareholders. In our book, alignment means being a partner in both directions, not just on the upside. Many "alignment" plans flunk this basic test, being artful forms of heads I win, tails you lose.

- Warren Buffett

Durability of the competitive advantage which gives the moat

The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.

- Warren Buffett

Small caps

You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map - way off the map. You may find local companies that have nothing wrong with them at all. You can't do that with big blue chips.

- Warren Buffett

Leverage

We wouldn't have liked those 99:1 odds - and never will. A small chance of distress or disgrace cannot, in our view, be offset by a large chance of extra returns. If your actions are sensible, you are certain to get good results; in most such cases, leverage just moves things along faster. Charlie and I have never been in a big hurry: We enjoy the process far more than the proceeds - though we have learned to live with those also.

- Warren Buffett

Conservative financial policies stood well for Buffett

Our consistently conservative financial policies may appear to have been a mistake, but in my view were not. In retrospect, it is clear that significantly higher, though still conventional, leverage ratios at Berkshire would have produced considerably better returns on equity than the 23.8% we have actually averaged. Even in 1965, perhaps we could have judged there to be a 99% probability that higher leverage would lead to nothing but good. Correspondingly, we might have seen only a 1% chance that some shock factor, external or internal, would cause a conventional debt ratio to produce a result falling somewhere between temporary anguish and default.

- Warren Buffett

Admission of mistake

Some of my worst mistakes were not publicly visible. These were stock and business purchases whose virtues I understood and yet didn't make. It's no sin to miss a great opportunity outside one's area of competence. But I have passed on a couple of really big purchases that were served up to me on a platter and that I was fully capable of understanding. For Berkshire's shareholders, myself included, the cost of this thumb-sucking has been huge.

- Warren Buffett

Do few things right and avoid big mistakes

An investor needs to do very few things right as long as he or she avoids big mistakes.

- Warren Buffett

Better of, if you know nothing

To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses - How to Value a Business, and How to Think About Market Prices.

- Warren Buffett

Read books

In my whole life, I have known no wise people who didn't read all the time - none, zero. You'd be amazed at how much Warren (Buffett) reads - at how much I read. My children laugh at me. They think I'm a book with a couple of legs sticking out.

- Charles Munger

20 times PE

People who habitually purchase common stocks at more than about 20 times their average earnings are likely to lose considerable money in the long run.

- Benjamin Graham & David Dodd

Modern investment banking

There is so much that’s false and nutty in modern investing practice and modern investment banking, If you just reduced the nonsense, that’s a goal you should reasonably hope for.

- Warren Buffett

What causes people real trouble

Leverage is what causes people real trouble in this world.

- Warren Buffett

Growth doesn't always benefit

Growth benefits investors only when the business in point can invest at incremental returns that are enticing - in other words, only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor.

- Warren Buffett

Don't worry about one quarter's results

As long as we can make an annual 15 percent return on equity, I don't worry about one quarter's results.

- Warren Buffett

Never hold off buying

It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because this may involve a long wait, very likely the loss of income, and the possible missing of investment opportunities. On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well-established standards of value. If he wants to be shrewd, he can look for the ever present bargain opportunities in individual securities.

- Benjamin Graham

Lethargy: required for investment

Lethargy, bordering on sloth should remain the cornerstone of an investment style.

- Warren Buffet

High prices for the best common stocks

According to our view, the high prices paid for 'the best common stocks' make these purchases essentially speculative, because they require future growth to justify them.

- Benjamin Graham & David Dodd

Marking up or down the value of capital

Obviously the stock market is quite irrational in thus varying its valuation of a company proportionately with the temporary changes in its reported profits. A private business might easily earn twice as much in a boom year as in poor times, but its owner would never think of correspondingly marking up or down the value of his capital investment.

- Benjamin Graham

Patsy?

If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.

- Warren Buffett

Impatient to patient

The stock market is a device for transferring money from the impatient to the patient.

- Warren Buffett

Who can be in the stock market

Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.

- Warren Buffett

What they are going to look like in ten to fifteen years time

I look for businesses in which I think I can predict what they're going to look like in ten to fifteen years time. Take Wrigley's chewing gum. I don't think the internet is going to change how people chew gum.

- Warren Buffett

Buy on the assumption that ....

I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years. As far as you are concerned, the stock market does not exist. Ignore it. Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.

- Warren Buffett

Economic cycles and their timings

If Fed Chairman Alan Greenspan were to whisper to me what his monetary policy was going to be over the next two years, it wouldn't change one thing I do.

- Warren Buffett

Common cause of low prices

The most common cause of low prices is pessimism - sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer.

- Warren Buffett

Fair price for a wonderful company than a fair company at a wonderful price

It's far better to buy a wonderful company at a fair price, than a fair company at a wonderful price. Charlie (Buffett's business partner) understood this early; I was a slow learner. But now, when buying companies or common stocks, we look for first-class businesses accompanied by first-class managements. Good jockeys will do well on good horses, but not on broken-down nags. The same managers employed in a business with good economic characteristics would have achieved fine records. But they were never going to make any progress while running in quicksand.

- Warren Buffett

Warren Buffett's guidelines

Your goal as an investor should be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now.

Over time, you will find only a few companies that meet these standards - so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist temptation to stray from your guidelines: If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years and so also will the portfolio's market value.

- Warren Buffett

Standard diversification dogma

The strategy we've adopted precludes us from following standard diversification dogma. Many pundits would therefore say our strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort level he must feel with its economic characteristics before buying into it.

- Warren Buffett

Diversification?

Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing.

- Warren Buffett

Define the circle

Draw a circle around the businesses you understand and then eliminate those that fail to qualify on the basis of value, good management, and limited exposure to hard times.

- Warren Buffett

Which is better

I'd rather have a $10 million business making 15 per cent than a $100 million business making 5 per cent.

- Warren Buffett

Investing in simple words

All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.

- Warren Buffett

Concentrate on companies and not on accounting mathematics

To be successful, you should concentrate on the world of companies, not arcane accounting mathematics.

- Warren Buffett

If the markets are efficient

I'd be a bum on the street with a tin cup if the markets were efficient.

- Warren Buffett

Look at the value not at the price

I own a farm about 30 minutes from here, and if you own a farm, you don't get a price on it every day. Look at the asset for value, not the price - as you would with a farm. People let the stock price, not business results, (affect their assessment of a company).

- Warren Buffett

Cheerful about the future

As I move close to the edge of death, I find myself getting more cheerful about the economic future,a final breakthrough that solves the main technical problem of man.

By harnessing the power of the sun, electrical power will become more available around the world. That will help humans turn sea water into fresh water and eliminate environmental problems, Munger explained.

If you have enough energy you can solve a lot of other problems.

- Charles Munger

You should not buy if you need a ...

If you need to use a computer or a calculator to make the calculation, you shouldn't buy it.

- Warren Buffet

Higher mathematics

Some of the worst business decisions I've ever seen are those with future projections and discounts back. It seems like the higher mathematics with more false precision should help you, but it doesn't. They teach that in business schools because, well, they've got to do something.

- Charles Munger

Circle of competence

What an investor needs is the ability to correctly evaluate selected businesses. Note that word "selected": You don't have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.

- Warren E. Buffett

Hard look ... not a hawk like watch

Most businesses change in character and quality over the years, sometimes for the better, perhaps more often for the worse. The investor need not watch his companies' performance like a hawk; but he should give it a good, hard look from time to time.

- Benjamin Graham

Buffett's criteria for selecting a business

We continually search for large businesses with understandable, enduring and mouth-watering economics that are run by able and shareholder-oriented managements. This focus doesn’t guarantee results: We both have to buy at a sensible price and get business performance from our companies that validate our assessment. But this investment approach - searching for the superstars - offers us our only chance for real success. (We) are simply not smart enough to get great results by adroitly buying and selling portions of far-from-great businesses.

- Warren Buffett

Focus on value not on trend

Too many investors focus on outlook and trend. Therefore, more profit is made by focusing on value. In the stock market the only way to get a bargain is to buy what most investors are selling.

- Sir John Templeton

Ignore noise

We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%. But, surprise: None of these blockbuster events made the slightest dent in Ben Graham’s investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices... a different set of major shocks is sure to occur in the next 30 years. We will neither try to predict these nor to profit from them. If we can identify businesses similar to those we have purchased in the past, external surprises will have little effect on our long-term results.

- Warren Buffett