1. Economic reality, not accounting reality

Accounting is conservative, backward-looking, governed by GAAP, net income

Value is forward looking, dependant on cash flow

2. The cost of lost opportunity

Compare investment opportunities against the next best alternative

3. Value creation: time is money

Intrinsic value is the present value of expected future performance.

?Some graduates will find that the book value of their education exceeds its intrinsic value, which means that whoever paid for the education didn?t get their money?s worth.?

4. Measure performance by gain in intrinsic value, not accounting profit

Economic profit or market value added?Earn returns above WACC

Ability to earn returns above expectations

Returns matter, not size or growth

5. Risk and discount rates

Theory?Risk premium for higher risk?CAPM

Buffett?Avoids risk?Uses risk-free rate Risk is possibility of loss or injury which is not important if you do sound analysis.

6. Diversification

Diversification is protection against ignorance. Focus on what you know.

7. Investing behavior should be driven by information, analysis, and self-discipline, not by emotion or ?hunch?

Awareness and information are key

?Anyone not aware of the fool in the market probably is the fool in the market.?

Don?t try to time the market.

Buffet scorns the Efficient Markets Hypothesis and its implication of no bargains in the market. ?It has been helpful to me to have tens of thousands turned out by business schools taught tat it didn?t do any good to think.?

8. Alignment of agents and owners

?I am a better businessman because I am an investor. And I am a better investor because I am a businessman.?

Warren E. Buffett, 2005 Case Template 1. Economic reality, not accounting reality Accounting is conservative, backward-looking, governed by GAAP, net income Value is forward looking, dependant on cash flow 2. The cost of lost opportunity Compare investment opportunities against the next best alternative 3. Value creation: time is money Intrinsic value is the present value of expected future performance. \"Some graduates will find that the book value of their education exceeds its intrinsic value, which means that whoever paid for the education didn't get their money's worth.\" 4. Measure performance by gain in intrinsic value, not accounting profit Economic profit or market value addedEarn returns above WACC Ability to earn returns above expectations Returns matter, not size or growth 5. Risk and discount rates TheoryRisk premium for higher riskCAPM BuffettAvoids riskUses risk-free rate Risk is possibility of loss or injury which is not important if you do sound analysis. 6. Diversification Diversification is protection against ignorance. Focus on what you know. 7. Investing behavior should be driven by information, analysis, and self-discipline, not by emotion or \"hunch\" Awareness and information are key \"Anyone not aware of the fool in the market probably is the fool in the market.\" Don't try to time the market. Buffet scorns the Efficient Markets Hypothesis and its implication of no bargains in the market. \"It has been helpful to me to have tens of thousands turned out by business schools taught tat it didn't do any good to think.\" 8. Alignment of agents and owners \"I am a better businessman because I am an investor. And I am a better investor because I am a businessman.\