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Buffett letter to shareholders (3) Corporate Finance and Investment Over the past 30 years, investment in the most revolutionary idea is the so-called modern financial theory. This is a fine idea, it can be summarized into a simple and misleading practice of meaning: The open circulation of the individual securities in the investment opportunity is a waste of time. According to this view, the list of throwing darts towards the stock portfolio for a randomly selected group of stocks, investment opportunities than the consideration of individual works, even make you rich. Modern finance theory is one of the main principles of modern portfolio theory. In its view, you can hold a diversified portfolio - that is, it the folk saying, &quot;Do not put all your eggs in one basket,&quot; an official of the - to eliminate the risk of any specific securities. The only remaining risk is that investors will receive compensation for risk, it is said that the risk of leaving through a simple mathematical terms - known as beta (beta) - to measure, Beta shows the fluctuations in the securities relative to the market degree. Effective market for trading in various securities, Beta full measure of this volatility in the effective market information on publicly traded securities are promptly and accurately reflected in the price. In the story of modern finance, the efficient market dominated everything. Respect to these concepts are not limited to the ivory tower of academia, college, university, business schools and law schools, but also became the U.S. financial sector over the past 35 years - from Wall Street (Wall Street) to the Avenue (Main Street) (Wall Street New York, is more than the location of exchanges and institutional investors; and Avenue in the United States each town has. from Wall Street to Avenue means to ordinary investors from professional investors. - Translator Note) - The standard dogma. Many portfolio managers continue to believe that stock prices always accurately reflect the fundamental value, the only important thing is the price volatility risk, but the best way to manage this risk is to invest in a diversified group of stocks. As part of a series of well-known investors - continue to Graham - Dodd - who through logic and experience to expose the standard dogma. Buffett believe that most markets do not fully effective and balanced with the risk of volatility of the overall distortion. Accordingly, Buffett worried about the generation of MBA and JD, they live in modern financial theory under the influence of errors in learning the course curriculum and missed an important risk. Modern financial theory in a costly lesson from the proliferation of portfolio insurance - a computer-based skills in the market fell again to adjust the portfolio. Blind use of portfolio insurance has accelerated in October 1987 market crash and the arrival in October 1989 market break. Nevertheless, it still has a good side: it broke the law schools, in business school professors, and many people are faithful to follow Wall Street&#39;s modern financial theory. Subsequent market volatility can not be explained by modern financial theory, it can not explain many other phenomena, these phenomena and small cap stocks, high dividend yield stocks and stocks with low price-earnings ratio behavior. Failure of the market&#39;s &quot;main course&quot; is the late 90s in the 20th century and early 21st century punctured the bubble of technology and Internet stocks, they are marked by stock price swing, this maneuver intermittently in the cheerful and bouncing between grief, do not even have contact with the enterprise value of the farthest. Increasing number of skeptics that the beta can not be the actual amount of the important side of the investment risk, short of capital market is actually not effective in beta meaningful. In the stir of discussion, people began to pay attention to Buffett&#39;s record of successful investment, and calls for return to Graham - Dodd method of investing and corporate governance. After all, in 40 years, Buffett has generated 20% or higher annual returns, which is 2 times the market average. In this 20 years ago, the Graham&#39;s Graham - Newman Inc. (Graham-Newman Corp.) Doing the same thing. As Buffett emphasized, Graham - Newman and Berkshire shocking performance worthy of respect: a large enough sample size; in a very long time, have achieved these results, it has not been Fortunately, several times through the distorted; no data mining; and these results are vertical, without the hindsight to select. Buffett&#39;s performance by the threat of modern financial theory stubborn converts to resort to strange on the success of Buffett explained. Maybe he is just lucky - play &quot;Hamlet&quot; (Hamlet) of the monkey - or he can come into contact with other investors within the reach of information. Buffett is not recognized in time, modern financial theory enthusiasts still insist that the best strategy for investors is based on beta or cast darts diversification, and continued re-allocation portfolios. Buffett and recommendations respond to irony: irony is that his investment philosophy of the converts are likely to be contributions to colleges and universities in the professorship, to ensure the efficient market dogma of permanent professors; suggestion is do not ignore the modern financial theory, and the market other quasi-mature perspective and focus on investing in plaiting (investment knitting). For many people, this can be long-term investment in index funds to achieve. Alternatively, it can also be assessed by investors within the ability of enterprises to be sober analysis. By this way of thinking, must bear the risk of not beta or volatility, but from investment in the possibility of damage or injuries. This investment risk assessment to consider the company&#39;s management, products, competition&#39;s debt level. This survey is an after-tax return on investment is at least equal to the fair rate of return on initial investment with purchasing power. The major risk factors is the company&#39;s long-term economic characteristics, the management of quality and integrity, the future level of rates or inflation rates. Perhaps these factors are vague, particularly with beta attractive when compared to the accuracy, but the key is to determine the theme of these rooms is inevitable, in addition to the adverse conditions outside investors. Buffett pointed out the absurdity of beta, he said: &quot;A relatively steep decline in the stock market has ... ... when in the low-cost than high price when it becomes &#39;more risk of a&#39;,&quot; This is how the beta measure of risk. Similarly unhelpful, beta value can not distinguish between &quot;selling pet rock (petrocks) or the hula hoop of the single-product toy company and the only product is another Monopoly game (Monopoly) or Barbie dolls (Barbie) between the toy companies &quot;the inherent risks. But ordinary investors can take into account consumer behavior and adoption of consumer products company to make Qufen of competing methods of Lai and Huan He Shi Gupiaojiage can conclude that the Xiadie means buying the Jihui. Contrast with the modern financial theory, Buffett&#39;s investment knitting does not require fragmentation. Even if not in the portfolio, at least in the minds of owners, it even can be called concentration. The portfolio concentration, Buffett reminds us that Keynes - he is not only a brilliant economist but also a shrewd investor - believe investors should be invested considerable funds to 23 enterprises, he was familiar with these enterprises, and enterprise management are also trustworthy. According to this view, when considering investment and investment is spread too empty, the risk increased. The concentration of financial and strategic thinking may reduce the risk, it increases the strength of investor consideration to, and prior to his purchase of the basic Tezheng Suoju You Bixu pair of comfortable 水平. By Buffett&#39;s words, the prevalence of beta negligence of &quot;a basic principle: the right approximate strength than precisely wrong.&quot; Long-term investment success does not depend on the value of beta, and maintain a diversified portfolio, but by understanding that as an investor, you are business owners. Through the sale of stock to accommodate the expected value of the low beta section, using this method to reconfigure the investment portfolio, thwarted long-term investment success. This &quot;flying in the flowers,&quot; to spread, in the form of fees and commissions collected a huge transaction costs, not to mention taxes. Buffett joked, saying that frequent trading in the market are investors, &quot;is like saying people who frequent *** is romantic.&quot; Investment work on the folk wisdom of modern financial theory twisted too far: not &quot;Do not put all your eggs in one basket,&quot; we &quot;fool Wilson&#39;s tragedy&quot; (Pudd&#39;nhead Wilson) to get the Mark Twain advice: &quot;put all your eggs in one basket - then watch live only basket.&quot; 20th century 50s, Buffett as a graduate student at Columbia Business School, Graham learned from the investment of the art, and later Graham - Newman company. In some classics, including &quot;smart investors&quot; (The Intelligent Investor), Graham has introduced the history of some of the most profound investment wisdom. It rejected the common but erroneous mindset, which is equated to the price and value. Instead, Graham thinks that the price you pay for things, but value is what you get. The same two things rare, but most of the income difference between a rare note. Graham, one of the most far-reaching contribution to living in a Wall Street figure, Mr. Market (Mr. Market). He is a business partner you assume that every day he bought the rights you are a business, according to prevailing market prices to sell you his interests. Mr. Market moody, easily between joy and despair, wild swing. Sometimes he bid higher than value; sometimes than the low value of his bid. The more he manic depression, the gap between price and value the greater the investment opportunities which provide him with the greater. Mr. Buffett once again introduced in the market, emphasizing the overall market&#39;s Fables Graham disciplined investment plan for is how valuable - even though modern financial theorists do not understand Mr. Market. Another important legacy from Graham is that he&#39;s safe space theory (margin ofsafety). The theory that a person should not be in a securities investment, unless there is sufficient evidence to believe that prices paid to bring the value of the securities is much lower. Buffett to follow this theory, he noted that Graham said that if a certain stability of the investment should be condensed into four words secret, they are: security space. Read it in the first 40 years after, Buffett continues to believe that these words are correct. While modern financial theory fanatics to deny the use of market efficiency price (you pay) and value (you get) there are differences between Buffett and Graham put it as all the difference in the world. This difference also shows that &quot;value investing, the term is redundant. All the real investment must be based on a relationship between price and value assessment. Do not use this price comparison between the value of the investment strategy is not investment, but speculation - and I hope the price will rise, rather than believe the price paid less than the value obtained. Buffett noted, many professionals to distinguish between &quot;growth investments&quot; and &quot;value investing&quot; when committed another common errors. Buffett said, growth, and values are not very different. They completely linked with, because growth will be treated as an integral part of the value. &quot;Relevant investment&quot; the word does not resonate to Buffett. The term mid-90s in the 20th century became popular, it describes an investment style. This style is designed by emphasizing the participation of shareholders and the management control, to reduce the shareholder ownership and management control of the isolation between the cost. Many people wrongly Buffett and Berkshire as an example of this description tag. Buffett to buy companies in a handful of large numbers of shares, then long-term stay, this is the fact. He also only invest in trust by the operation of his business. But the similarity is the case. If you insist on Buffett to use an adjective to describe his investment style, then this term might be &quot;focused&quot; investment or &quot;smart&quot; investment. However, even these words are also sent extra sound; without modification of the terms most appropriate expression of the investor Warren Buffett. Other terms of abuse, including, fuzzy speculative and arbitrage as a stable difference between cash management; latter Berkshire generated a lot of excess cash that the company is very important. Speculation and arbitrage, rather than holding such as commercial paper, short-term cash equivalents, are used more than the cash method. Speculation that is not published under the forthcoming trade rumors, with the cash to gamble on them a lot of company events. Arbitrage - the traditional understanding of the market in two different full use of the same thing for different prices, Duiyu Buffett say is that in terms of cash in a number of opportunities have been publicly announced buy short-term positions, which make full use of the same thing for different prices at different times. Determine whether the use of cash in this way, request, pursuant to hearsay information Bushi judge four common sense Xing De issues: events occur in the Keneng Xing, Zi Jin Bei locked in time, opportunity costs, and if the incident occurred when Mei You Xia Die. Ability to circle principle is Buffett / Graham wise investment for the third leg of the bench, along with Mr. Market and the security space. This common-sense rules to teach investors to consider investing in them only a little effort can be understood with the company. It is this insist on doing their own things to know, so Buffett to avoid other people, especially those who have illusions about getting rich quick; breeding centuries often speculative market, fashion and technology promise a new era of rhetoric that Fantasy repeat mistakes. In all of the investment consideration, one must guard against Buffett calls &quot;habits of need.&quot; This is a pervasive force, the driving force in the customary denial of such a force in the change, suck all the available shares in the company&#39;s funds, and CEO agreed to subordinate reflex strategy not so good. And who often in business schools and law schools, professors of different, often interfere with this powerful and reasonable business decisions. Habits need to mimic the end result is the industry rather than the industry leader in the sheep mentality - for businesses, Buffett called the lemming-like approach.
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