If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter. Predicting the long-term economics of companies that operate in fast-changing industries is simply far beyond our perimeter. If others claim predictive skill in those industries — and seem to have their claims validated by the behavior of the stock market — we neither envy nor emulate them. Instead, we just stick with what we understand. If we stray, we will have done so inadvertently, not because we got restless and substituted hope for rationality. Fortunately, it’s almost certain there will be opportunities from time to time for Berkshire to do well within the circle we’ve staked out.

Source:   Berkshire Hathaway Shareholder Letters

At Berkshire, we make no attempt to pick the few winners that will emerge from an ocean of unproven enterprises. We’re not smart enough to do that, and we know it. Instead, we try to apply Aesop’s 2,600-year-old equation to opportunities in which we have reasonable confidence as to how many birds are in the bush and when they will emerge (a formulation that my grandsons would probably update to “A girl in a convertible is worth five in the phonebook.”). Obviously, we can never precisely predict the timing of cash flows in and out of a business or their exact amount. We try, therefore, to keep our estimates conservative and to focus on industries where business surprises are unlikely to wreak havoc on owners. Even so, we make many mistakes: I’m the fellow, remember, who thought he understood the future economics of trading stamps, textiles, shoes and second-tier department stores.

Source:   Berkshire Hathaway Shareholder Letters

Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%. When control-type purchases of quality aren’t available, though, we are also happy to simply buy small portions of great businesses by way of stock market purchases. It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone.

Source:   Berkshire Hathaway Shareholder Letters

To us investing is the equivalent of going out and betting against the pari-mutuel system. We look for a horse with one chance in two of winning and which pays you three to one. You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing.

Source:   Poor Charlie's Almanack

The danger in a growth-stock program lies precisely here. Fop such favored issues the market has a tendency to set prices which will not be adequately protected by a conservative projection of future earnings. (It is a basic rule of prudent investment that all estimates, when they differ from actual performance, must err at least slightly on the side of understatement.) The margin of safety is always dependent on the price paid.

Source:   The Intelligent Investor

The margin-of-safety idea becomes much more evident when we apply it to the field of undervalued or bargain securities. We have here, by definition, a favorable difference between price on the one hand and indicated or appraised value on the other. That difference is the safety margin. It is available for absorbing the effect of miscalculations or worse-than-average luck. The buyer of bargain issues places particular emphasis on the ability of the investment to withstand adverse developments. For in most cases he has no enthusiasm about the company’s prospects.

Source:   The Intelligent Investor

The reason I feel that he [Karl Popper] is important to us traders is because to him the matter of knowledge and discovery is not so much in dealing with what we know, as in dealing with what we don't know…My extreme an obsessive Popperism is carried out as follows: I speculate in all of my activities on theories that represent some vision of the world, but with the following stipulation: No rare event should harm me. In fact, I would like all conceivable rare events to to help me.

Source:   Fooled By Randomness

Perfection in investing in generally unobtainable; the best we can hope for is to make a lot of good investments and exclude most of the bad ones.

Source:   The Most Important Thing

Where does that leave us? If the risk of loss can’t be measured, quantified or even observed—and if it’s consigned to subjectivity—how can it be dealt with? Skillful investors can get a sense for the risk present in a given situation. They make that judgment primarily based on (a) the stability and dependability of value and (b) the relationship between price and value. Other things will enter into their thinking, but most will be subsumed under these two.

Source:   The Most Important Thing

And that brings me to the quotation from Elroy Dimson that led off this chapter: “Risk means more things can happen than will happen.” Now we move toward the metaphysical aspects of risk.

Source:   The Most Important Thing

Whereas the theorist thinks return and risk are two separate things, albeit correlated, the value investor thinks of high risk and low prospective return as nothing but two sides of the same coin, both stemming primarily from high prices.

Source:   The Most Important Thing

You need the ability to detect instances in which prices have diverged significantly from intrinsic value. You have to have a strong-enough stomach to defy conventional wisdom (one of the greatest oxymorons) and resist the myth that the market’s always efficient and thus right. You need experience on which to base this resolute behavior. And you must have the support of understanding, patient constituencies. Without enough time to ride out the extremes while waiting for reason to prevail, you’ll become that most typical of market victims: the six-foot-tall man who drowned crossing the stream that was five feet deep on average.

Source:   The Most Important Thing

When buyers compete to put large amounts of capital to work in a market, prices are bid up relative to value, prospective returns shrink, and risk rises. It’s only when buyers predominate relative to sellers that you can have highly overpriced assets. The warning signs shouldn’t be hard to spot.

Source:   The Most Important Thing

The lender who insists on margin for error and lends only to strong borrowers will experience few credit losses. But this lender’s high standards will cause him or her to forgo lending opportunities that will go to lenders who are less insistent on creditworthiness. The aggressive lender will look smarter than the prudent lender (and make more money) as long as the environment remains salutary. The prudent lender’s reward comes only in bad times, in the form of reduced credit losses. The lender who insists on margin for error won’t enjoy the highest highs but will also avoid the lowest lows. That’s what happens to those who emphasize defense.

Source:   The Most Important Thing

Of the two ways to perform as an investor—racking up exceptional gains and avoiding losses—I believe the latter is the more dependable.

Source:   The Most Important Thing

I don’t think many investment managers’ careers end because they fail to hit home runs. Rather, they end up out of the game because they strike out too often—not because they don’t have enough winners, but because they have too many losers.

Source:   The Most Important Thing

Worry about the possibility of loss. Worry that there’s something you don’t know. Worry that you can make high-quality decisions but still be hit by bad luck or surprise events. Investing scared will prevent hubris; will keep your guard up and your mental adrenaline flowing; will make you insist on adequate margin of safety; and will increase the chances that your portfolio is prepared for things going wrong. And if nothing does go wrong, surely the winners will take care of themselves.

Source:   The Most Important Thing

I can proclaim what I call the "human uncertainty principle". That principle holds that people's understanding of the world in which they live cannot correspond to the facts and be complete and coherent at the same time. Insofar as people's thinking is confined to the facts, it is not sufficient to reach decisions; and insofar as it serves as the basis of decisions, it cannot be confined to the facts. The human uncertainty principle applies to both thinking and reality. It ensures that our understanding is often incoherent and always incomplete and introduces an element of genuine uncertainty - as distinct from randomness - into the course of events. [and hence the need for margin of safety]

Source:   The Alchemy of Finance

I made a conscious effort to find investment theses that were at odds with the prevailing opinion because that's where the best profit opportunities are to be found. I defined my task as engaging in an arbitrage between my own judgement and the prevailing view.

Source:   The Alchemy of Finance

The reason why the growth stocks do so much better is that they seem to show gains in value in the hundreds of per cent each decade. In contrast, it is an unusual bargain that it is as much as 50 per cent undervalued. The cumulative effect of this simple arithmetic should be obvious.

Source:   Common Stocks and Uncommon Profits

Warren Buffett, [Graham's] most famous student, explains, “There are three important principles to Graham’s approach.” The first is simply looking at stocks as businesses, which “gives you an entirely different view than most people who are in the market.” The second is the margin-of-safety concept, which “gives you the competitive edge.” And the third is having a true investor’s attitude toward the stock market. “If you have that attitude,” says Buffett, “you start out ahead of 99 percent of all the people who are operating in the stock market—it is an enormous advantage.”

Source:   The Warren Buffett Way