Excess cash

Most high-return businesses need relatively little capital. Shareholders of such a business usually will benefit if it pays out most of its earnings in dividends or makes significant stock repurchases.

- Warren Buffett

Leaving excessive cash at the disposal of the managers brings a lethargic attitude or forces them to expand their empires by acquisitions. This is why managers should be made accountable to regularly return the excess cash through dividends or buy backs, thus bringing down the cash level. This discipline forces the manager to be responsible to regularly return a portion of net earnings and work with the limited working capital and optimise the asset utilisation as well as the returns. The only exception to this rule is Warren Buffett himself as he has demonstrated a better capacity than an ordinary manager to deploy the excess cash generated by his managers of individual business units over a long term with consistency.

Where you should not be

They know that overstaying the festivities - that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future - will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.

- Warren Buffett

Lower price

If they reduce the price of hamburgers at McDonald's today I feel terrific. Now I don't go back and think, gee, I paid a little more yesterday. I think I'm going to be buying them cheaper today. Anything you're going to be buying in the future, you want to have get cheaper.

- Warren Buffett

The above quote goes against the principle advocated by the 'technical analysis' based investors who advocate the stop loss theories. Well, if you have fairly correct with the entry price point after a thorough analysis of the company and the reason for the current correction in the market price, you need not worry about further price corrections. Instead, it gives an opportunity to buy the company at a lower price than the 'intrinsic value' as identified by you. It is like buying a dollar for fifty cents.

But before you jump to conclusions, the responsibility lies with the investor to analyse the company and then arrive at the fair value price range. And if you are wrong in any of these two variables, the ground falls apart.

Remember over consuming hamburgers is not good for your health. The same applies to the stocks. Laying all your eggs in the same basket would also backfire. So be judicious on overindulgence knowing the pitfalls.

Know what you don't know.

One of the greatest pieces of economic wisdom is to know what you do not know.

- John Kenneth Galbraith

Here is a partial list of what I don't know.

1. Technical terms used by the pharmaceutical industry and correlate with the economic output the industry generates.
2. The way most of the real estate companies operate to earn their bread and butter.
3. To predict the year end price targets of indexes.