Mr. Market and the margin of safety
Buffett, via Graham, casts the market as a moody partner offering daily prices you may accept or ignore. Buying well below intrinsic value provides a margin of safety against error and misfortune.
The essays of Warren Buffett
10 ideas
Circle of competence
He insists investors act only within the industries they genuinely understand. Knowing the boundary of your competence matters more than its size.
Economic moats sustain returns
Durable competitive advantages, or moats, protect a business's profits from competitors. Buffett prizes companies whose moats widen over time.
Owner-oriented governance
Cunningham organizes the letters around treating managers as stewards of owners' capital. Buffett argues boards and executives should think like long-term partners, not hired hands.
Mark-to-market of your temperament
He argues that emotional discipline, not intellect, separates good investors. The ability to be greedy when others are fearful is the decisive edge.
See's Candies and the value of goodwill
In 1972 Buffett and Charlie Munger, through Berkshire affiliate Blue Chip Stamps, paid $25 million for See's Candies, a California chocolate maker with about $8 million in net tangible assets, far more than a book-value investor would pay. Buffett uses the case to show how economic goodwill differs from the accounting goodwill on the balance sheet.
The one-dollar retained earnings test
Management should keep a dollar of earnings only if that dollar creates at least one dollar of market value for shareholders over time. If retained capital earns less than owners could get elsewhere, it should be paid out or used for buybacks. Buybacks are justified only when the shares trade below intrinsic value.
Look-through earnings over reported earnings
GAAP lets an owner of under 20% of a company report only the dividends it receives, which hides that owner's share of retained earnings. Buffett's look-through earnings add his proportional share of investees' undistributed profits, minus the tax he would owe if those profits were paid out. The retained earnings count as value only to the extent they are later reinvested at good returns.
Acquirers destroy value paying in undervalued stock
When a company issues its own undervalued shares to buy another business, the buyer's owners give up more intrinsic value than they receive, even if the deal looks accretive. Managers do these deals because their incentives reward size and activity. The fix is to treat the acquirer's own stock as the real currency of the deal and to price the trade in intrinsic value on both sides.
Insurance float as free borrowed capital
An insurer collects premiums long before it pays claims, so it holds and invests money that belongs to others. If underwriting breaks even or makes a profit, that float costs nothing or less than nothing, which makes it cheaper than debt or equity. Viewed this way, an insurance company's worth depends on the size of its float, how long it lasts, and the discipline to turn down underpriced policies.