Beta and Modern Portfolio theory

Beta and modern portfolio theory and the like - none of it makes any sense to me.

- Charles Munger

What is risk

Risk comes from not knowing what you're doing.

- Warren Buffett

Inflation

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

- John Maynard Keynes

Keep it simple will do

Keep it simple and remember what you set out to do.

- Charles Munger

Be disciplined

We don't have to be smarter than the rest; we have to be more disciplined than the rest.

- Warren Buffett

It is an art, not a science

As I look back on it now, it's obvious that studying history and philosophy was much better preparation for the stock market than, say, studying statistics. Investing in stocks is an art, not a science, and people who've been trained to rigidly quantify everything have a big disadvantage. If stockpicking could be quantified, you could rent time on the nearest Cray computer and make a fortune. But it doesn't work that way. All the math you need in the stock market you get in the fourth grade.

- Peter Lynch

Two extreme behaviors of the market participants

While we were writing, we had to combat a widespread conviction that financial debacle was to be the permanent order; as we publish, we already see resurgent the age-old frailty of the investor-that his money burns a hole in his pocket. But it is the conservative investor who will need most of all to be reminded constantly of the lessons of 1931-1933 and of previous collapses. ... We have striven throughout to guard the student against overemphasis upon the superficial and the temporary. Twenty years of varied experience in Wall Street have taught the senior author that this overemphasis is at once the delusion and the nemesis of the world of finance.

- Preface to the First Edition of Security Analysis by Benjamin Graham & David L. Dodd.

The authors bring two extreme behaviors of the market participants in one sentence. During market collapses, people tend to extrapolate the severity and justify the permanency of what has already occurred. But market tends to ignore these opinion and bounce back even before people could realise it. Similarly, as the market rise up further and further, the investor loses his patience and jumps in into market. In both the situations, emotions would have overruled the investors logical investment decisions. The underlying cause in both the situations is to view the permanency of the current situation into the future. A conservative investor has to overcome this tendency and have to take logical decisions overcoming the emotions which are formed by what we see and read day in and out.

Act decisively

When proper circumstances present themselves, act with decisiveness and conviction.

- Charles Munger

What can be too much

I have owned one stock since 1969, two since 1988 and one I started buying in 1986 or so. That's my portfolio. Six stocks. I once owned 17, but that was way too much.

- Philip Fisher

Thanks God

Proper accounting is like engineering. You need a margin of safety. Thank God we don't design bridges and airplanes the way we do accounting.

- Charles Munger

Your ideas and future

We have been trying to point out that this concept of an indefinitely favorable future is dangerous, even if it is true; because even if it is true you can easily overvalue the security, since you make it worth anything you want it to be worth. Beyond this, it is particularly dangerous too, because sometimes your ideas of the future turn out to be wrong. Then you have paid an awful lot for a future that isn't there. Your position then is pretty bad.

- Benjamin Graham

Why 'growth stocks' would go wrong

There was nothing wrong with these ideas, except that it was almost impossible not to carry them too far. With encouragement from the past and a rosy prospect in the future, the buyers of 'growth stocks' were certain to lose their sense of proportion and pay excess prices. For no clear-cut arithmetic sets a limit to the present value of a constantly increasing earning power. Such issues could become worth any value set upon them by an optimistic market.

- Benjamin Graham

Function of Margin of Safety

The function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future. If the margin is a large one, then it is enough to assume that future earnings will not fall far below those of the past.

- Benjamin Graham

Question to managers and directors

Managers and directors might sharpen their thinking by asking themselves if they would sell 100% of their business on the same basis they are being asked to sell part of it. And if it isn't smart to sell all on such a basis, they should ask themselves why it is smart to sell a portion. A cumulation of small managerial stupidities will produce a major stupidity - not a major triumph.

- Warren Buffett