When Warren lectures at business schools he says “I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches – representing all the investments that you get to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do so much better.”

Source:   Poor Charlie's Almanack

Beta and Modern Portfolio Theory and the like – none of it makes any sense to me…how can professors spread this? I’ve been waiting for this craziness to end for decades. It’s been dented and it’s still out there.

Source:   Poor Charlie's Almanack

How many insights do you need? Well, I’d argue that you don’t need many in a lifetime. If you look at Berkshire Hathaway and all its accumulated billions, the top ten insights account for most of it. And that’s with a very brilliant man – Warren’s a lot more able than I am and very disciplined – devoting his lifetime to it. I don’t mean to say that he’s only had ten insights. I’m just saying that most of the money came from ten insights.

Source:   Poor Charlie's Almanack

To me it’s obvious that the winner has to be bet very selectively. It’s been obvious to me since very early in life. I don’t know why it’s not obvious to many other people. I think the reason why we got into such idiocy in the investment management business is best illustrated by a story that I tell about the guy who sold fishing tackle. I asked him, “My God, they’re purple and green. Do fish really take these lures?” And he said “Mister, I don’t sell to fish”.

Source:   Poor Charlie's Almanack

In Investment Management today, everybody wants not only to win, but to have the path never diverge very much from a standard path except on the upside. Well, that is a very artificial, crazy construct…It’s the equivalent of what Nietzsche meant when he criticized the man who had a lame leg and was proud of it. That is really hobbling yourself. Now, investment managers would say, “We have to be that way. That’s how we’re measured.” And they may be right in terms of the way the business is now constructed. But from the viewpoint of a rational consumer, the whole system’s bonkers and draws a lot of talented people into a socially useless activity.

Source:   Poor Charlie's Almanack

It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it - who look and sift the world for a mispriced bet - that they can occasionally find one. And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time they don't. It's just that simple.

Source:   Poor Charlie's Almanack

If you invested Berkshire Hathaway-style, it would be hard to get paid as an investment manager as well as they're currently paid - because you'd be holding a block of Wal-Mart aand a block of Coca-Cola and a block of something else. You'd be sitting on your ass. And the client would be getting rich. And, after a while, the client would think, "why am I paying this guy half-a-percent a year on my wonderful passive holdings?" So what makes sense for the investor is different from what makes sense for the manager. And, as usual in human affairs, what determines the behavior are incentives for the decision maker.

Source:   Poor Charlie's Almanack

[Most Investment Managers are] in a game where the clients expect them to know a lot of things. We didn't have any clients who could fire us at Berkshire Hathaway. So we didn't have to be governed by any such construct. And we came to this notion of finding a mispriced bet and loading up when we were very confident that we were right. So we're way less diversified. And I think our system is miles better.

Source:   Poor Charlie's Almanack

There have been many efforts of late to make risk assessment more scientific. Financial institutions routinely employ quantitative “risk managers” separate from their asset management teams and have adopted computer models such as “value at risk” to measure the risk in a portfolio. But the results produced by these people and their tools will be no better than the inputs they rely on and the judgments they make about how to process the inputs. In my opinion, they’ll never be as good as the best investors’ subjective judgments.

Source:   The Most Important Thing

Controlling the risk in your portfolio is a very important and worthwhile pursuit. The fruits, however, come only in the form of losses that don’t happen. Such what-if calculations are difficult in placid times.

Source:   The Most Important Thing

Active management strategies demand uninstitutional behavior from institutions, creating a paradox that few can unravel. Establishing and maintaining an unconventional investment profile requires acceptance of uncomfortably idiosyncratic portfolios, which frequently appear downright imprudent in the eyes of conventional wisdom.

Source:   The Most Important Thing

Risk control and margin for error should be present in your portfolio at all times. But you must remember that they’re “hidden assets.” Most years in the markets are good years, but it’s only in the bad years—when the tide goes out—that the value of defense becomes evident. Thus, in the good years, defensive investors have to be content with the knowledge that their gains, although perhaps less than maximal, were achieved with risk protection in place … even though it turned out not to be needed.

Source:   The Most Important Thing

...practical investors usually learn their problem is finding enough outstanding investments, rather than choosing among too many. The occasional investor who does find more such unusual companies than he really needs seldom has the time to keep in close enough touch with all additional corporations.

Source:   Common Stocks and Uncommon Profits

Usually a very long list of securities is not a sign of the brilliant investor, but of one who is unsure of himself.

Source:   Common Stocks and Uncommon Profits

...an analyst must learn the limits of his or her competence and tend well the sheep at hand.

Source:   Common Stocks and Uncommon Profits

[Buffett] refers to himself as a “focus investor”—“We just focus on a few outstanding companies.” This approach, called focus investing, greatly simplifies the task of portfolio management.

Source:   The Warren Buffett Way

We have all heard this mantra of diversification for so long that we have become intellectually numb to its inevitable consequence: mediocre results. Both active and index funds do offer diversification, but, in general, neither strategy will give you exceptional returns.

Source:   The Warren Buffett Way

What’s wrong with conventional diversification? For one thing, it greatly increases the chances that you will buy something you don’t know enough about. “Know-something” investors, applying the Buffett tenets, would do better to focus their attention on just a few companies—five to 10, Buffett suggests. For the average investor, a legitimate case can be made for investing in 10 to 20 companies.

Source:   The Warren Buffett Way

"It is a mistake to think one limits one’s risk by spreading too much between enterprises which one knows little and has no reason for special confidence. . . . One’s knowledge and experience are definitely limited and there are seldom more than two or three enterprises at any given time in which I personally feel myself entitled to put full confidence." [said Keynes]

Source:   The Warren Buffett Way

Keynes prepared a full policy report for the Chest Fund, outlining his principles: 1. A careful selection of a few investments having regard to their cheapness in relation to their probable actual and potential intrinsic [emphasis his] value over a period of years ahead and in relation to alternative investments at the time; 2. A steadfast holding of these fairly large units through thick and thin, perhaps several years, until either they have fulfilled their promise or it is evident that they were purchased on a mistake; 3. A balanced [emphasis his] investment position, i.e., a variety of risks in spite of individual holdings being large, and if possible opposed risks.

Source:   The Warren Buffett Way

“Typically, people start out their careers in an analyst function but aspire to get promoted to the more prestigious portfolio manager designation. To the contrary, we have always believed that if you are a long-term investor, the analyst function is paramount and the portfolio management follows naturally.” [said Bill Ruane]

Source:   The Warren Buffett Way

Buffett, Munger, Ruane, Simpson. It is clear the superinvestors of Buffettville have a common intellectual approach to investing. They are united in their belief that the way to reduce risk is to buy stocks only when the margin of safety (that is, the favorable discrepancy between the intrinsic value of the company and today’s market price) is high. They also believe that concentrating their portfolios around a limited number of these high-probability events not only reduces risk, but helps to generate returns far above the market rate of return.

Source:   The Warren Buffett Way

To eliminate any notion that the five superinvestors of Buffettville are nothing more than statistical aberrations, we need to examine a wider field. Unfortunately, the population of focus investors is very small. Among the thousands of portfolio managers who manage money, there are only a scant few who manage concentrated portfolios. Thus we are left with the same challenge.

Source:   The Warren Buffett Way

Interestingly, Cremers reports that in 1980, 50 percent of large-cap mutual funds had an active share score of 80 percent or more. That is, half the mutual funds had a portfolio that was significantly different from their benchmark. Today, just 25 percent of mutual funds are considered truly active. “Both investors and fund managers have become more benchmark-aware,” says Cremers. “As a manager, you want to avoid being in the bottom 20% or 40% (of your peer group). The safest way to do that, especially when you’re evaluated over the shorter time periods, is to hug the index.”

Source:   The Warren Buffett Way

Focus investing is necessarily a long-term approach to investing. If we were to ask Buffett what he considers an ideal holding period, he would answer, “Forever”—so long as the company continues to generate above-average economics and management allocates the earnings of the company in a rational manner. “Inactivity strikes us as an intelligent behavior,” he explains.

Source:   The Warren Buffett Way

“Neither we nor most business managers would dream of feverishly trading highly profitable subsidiaries because a small move in the Federal Reserve’s discount rate was predicted or because some Wall Street pundit has reversed his views on the market. Why, then, should we behave differently with our minority positions in wonderful businesses?” [says Buffett]

Source:   The Warren Buffett Way

What strategies lend themselves best to low turnover rates? One possible approach is a low-turnover index fund. Another is a focus portfolio. “It sounds like premarital counseling advice,” say Jeffrey and Arnott, “namely, to try to build a portfolio that you can live with for a long, long time.”

Source:   The Warren Buffett Way

Is this constant fixation on stock prices healthy for investors? Richard Thaler has a crisp answer. He lectures frequently at the Behavioral Conference sponsored by the National Bureau of Economic Research and the John F. Kennedy School of Government at Harvard University, and he always includes this advice: “Invest in equities and then don’t open the mail.” To which we might add, “And don’t check your computer or your phone or any other device every minute.”

Source:   The Warren Buffett Way

A quality investment philosophy is like a good diet: it only works if it is sensible over the long haul and you stick with it.

Source:   More Than You Know

The sad truth is that incentives have diluted the importance of investment philosophy in recent decades. While well intentioned and hard working, corporate executives and money managers too frequently prioritize growing the business over delivering superior results for shareholders. Increasingly, hired managers get paid to play, not to win.

Source:   More Than You Know

Four attributes generally set this group apart from the majority of active equity mutual fund managers: 1) [Low] Portfolio turnover. 2) [High] Portfolio Concentration. 3) Investment Style - [intrinsic-value investment approach]. 4) Geographical Location - [being away from money-centers like New York or Boston].

Source:   More Than You Know

The frequency of correctness does not matter; it is the magnitude of correctness that matters.

Source:   More Than You Know

Constantly thinking in expected-value terms requires discipline and is somewhat unnatural. But the leading thinkers and practitioners from somewhat varied fields have converged on the same formula: focus not on the frequency of correctness but on the magnitude of correctness.

Source:   More Than You Know

Portfolio managers who underperform the market risk losing assets, and ultimately their jobs. So their natural reaction is to minimize tracking error versus a benchmark. Many portfolio managers won’t buy a controversial stock that they think will be attractive over a three-year horizon because they have no idea whether or not the stock will perform well over a three-month horizon. This may explain some of the overreaction we see in markets and shows why myopic loss aversion may be an important source of inefficiency.

Source:   More Than You Know

When describing markets, financial economists generally assume a definable tradeoff between risk and reward. Unfortunately, the empirical record defies a simple risk-reward relationship. As Benoit Mandelbrot has argued, failure to explain is caused by failure to describe.

Source:   More Than You Know