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My recommendation: 10/10

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Summary of notes and ideas

I read the book years ago and reread it end of last year. Buffett’s investing wisdom is hard to beat.

“Warren Buffett stresses that the critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price. He doesn’t care what the general stock market has done recently or will do in the future”

“How can the average investor employ Warren Buffett’s methods? Warren Buffett never invests in businesses he cannot understand or that are outside his Circle of Competence.” All investors can, over time, obtain and intensify their “Circle of Competence” in an industry where they are professionally involved or in some sector of business they enjoy researching.”

“Warren Buffett has established a high standard for the future performance of Berkshire by setting an objective of growing intrinsic value by 15 percent a year over the long term, something few people, and no one from 1956 to 1993 besides himself, have ever done.”

“Regardless, I guarantee that you cannot be Warren Buffett no matter what you read or how hard you try. You have to be yourself. That is the greatest lesson I got from my father, a truly great teacher at many levels—not to be him or anyone else, but to be the best I could evolve into, never quitting the evolution.”

“We know it is Buffett’s preference to “buy certainties at a discount. Certainties” are defined by the predictability of a company’s economics. The more predicable a company’s economics, the more certainty we might have about its valuation.”

“Within his circle of competence, the types of stocks he likes to purchase are not currently selling at discounted prices. At the same time, outside his circle of competence, faster-growing businesses are being born in new industries that have yet to achieve the high level of economic certainty Buffett requires.”

“Too often, shareholders forget one of the most important owner-related business principles Buffett outlines each year in the annual report. The fourth principle states, “Our preference would be able to reach our goal [of maximizing Berkshire’s average annual rate of gain in intrinsic value] by directly owning a diversified group of businesses that generate cash and consistently earn above average returns on capital.”

“There appear to be two obvious choices. One is to make an investment in Berkshire Hathaway and so participate in the economics of these outstanding businesses. The second choice is to take the Buffett approach to investing, expand your circle of competence by studying intently the business models of the companies participating in the New Economy landscape, and march ahead.”

“The next part of Graham’s definition is critical: A true investment must have two qualities—some degree of safety of principal and a satisfactory rate of return. Safety, he cautions, is not absolute; unusual or improbable occurrences can put even a safe bond into default. Rather, investors should look for something that would be considered safe from loss under reasonable conditions.”

“In Graham’s view, establishing a margin-of-safety concept for bonds was not too difficult. It wasn’t necessary, he said, to accurately determine 14 the company’s future income, but only to note the difference between earnings and fixed charges. If that margin was large enough, the investor would be protected from an unexpected decline in the company’s income.”

“Graham’s definition of intrinsic value, as it appeared in Security Analysis, was “that value which is determined by the facts.” These facts included a company’s assets, its earnings and dividends, and any future definite prospects. Graham acknowledged that the single most important factor in determining a company’s value was its future earnings power, a calculation that is bound to be imprecise. Simply stated, a company’s intrinsic value could be found by estimating the earnings of the company and multiplying the earnings by an appropriate capitalization factor. The company’s stability of earnings, assets, dividend policy, and financial health influenced this capitalization factor or multiplier.”

“However, analysts came to know that the value of a company was not only its net real assets but also the value of the earnings that these assets produced. Graham proposed that it was not essential to determine a company’s exact intrinsic value; instead, investors should accept an approximate measure or range of value. Even an approximate value, compared against the selling price, would be sufficient to gauge margin of safety.”

“Today, most investors rely on John Burr Williams’s classic definition of value, described later in this chapter: The value of any investment is the discounted present value of its future cash flow”

“rom these experiences, Fisher came to believe that people could make superior profits by investing in companies with above-average potential and (2) aligning themselves with the most capable management. To isolate these exceptional companies, Fisher developed a point system that qualified a company by the characteristics of its business and its management.”

“ability to grow sales over the years at rates greater than the industry average. 6That growth, in turn, usually was a combination of two factors: a significant commitment to research and development, and an effective sales organization”

“Generally, his portfolios included fewer than ten companies, and often three to four companies represented 75 percent of his entire equity portfolio. Fisher believed that, to be successful, investors needed to do just a few things well”

“Nonetheless, Schumpeter’s suggestion was the impetus for Williams’s famous doctoral dissertation, which, as The Theory of Investment Value, has influenced financial analysts and investors ever since.”

“Williams’s model is a two-step process. First it measures cash flows to determine a company’s current and future worth. How to estimate cash flows? One quick measure is dividends paid to shareholders. For companies that do not distribute dividends, Williams believed that in theory all retained earnings should eventually turn into dividends”

“In short, a stock is worth only what you can get out of it.”

“He uses either the interest rate for longterm (meaning ten-year) U.S. bonds, or when interest rates are very low, he uses the average cumulative rate of return of the overall stock market”

“Graham taught Buffett that if he could insulate himself from the emotional whirlwinds of the stock market, he had an opportunity to exploit the irrational behavior of other investors, who purchased stocks based on emotion, not logic.”

…these are, of course, not all notes I made but I should leave some wisdom properly stucked away in the book. A total classic, Buffett, of course. Please pick up a copy and enjoy the read.

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