Question
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
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.?
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