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
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
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
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
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.