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Mr. Market's Manic Episodes: Warren Buffett's Timeless Guide to Rational Investing

By sagebytes —

Warren Buffett's Investment Best Practices

Extracted from Berkshire Hathaway's 1987 Shareholder Letter

Core Investment Philosophy

Focus on Business Value, Not Stock Prices

  • "What counts is the rate of gain in per-share business value, not book value."
  • Approach stock purchases as if buying into a private business, focusing on economic prospects, management quality, and price.
  • Be willing to hold investments indefinitely if the business continues to increase in intrinsic value at a satisfactory rate.

Mr. Market Mentality

  • View market fluctuations as coming from "Mr. Market," an emotionally unstable business partner who offers to buy your interest or sell his each day.
  • "Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful."
  • Market volatility offers opportunities to the patient, rational investor.

Business Quality Over Bargain Hunting

  • "Our goal is to find an outstanding business at a sensible price, not a mediocre business at a bargain price."
  • "Making silk purses out of silk is the best that we can do; with sow's ears, we fail."
  • Exceptional economics often come from businesses doing "rather ordinary things - but doing them exceptionally well."

Long-Term Perspective

  • "Experience indicates that the best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago."
  • Be suspicious of exotic-sounding businesses that promise feverish change.
  • "The market may ignore business success for a while, but eventually will confirm it."

Investment Selection Criteria

Look for Businesses That:

  1. Have demonstrated consistent earning power (not projections or turnarounds)
  2. Earn good returns on equity while employing little or no debt
  3. Have simple, understandable operations
  4. Have excellent management in place
  5. Have durable competitive advantages (franchise value)

Debt Considerations

  • "Really good businesses usually don't need to borrow."
  • Top-performing companies typically use very little leverage compared to their interest-paying capacity.

Market Approach

Ignore Market Predictions and Formulas

  • "Investment success will not be produced by arcane formulae, computer programs or signals flashed by the price behavior of stocks and markets."
  • Success comes from "coupling good business judgment with an ability to insulate thoughts and behavior from the super-contagious emotions that swirl about the marketplace."

Holding vs. Selling

  • Don't sell holdings just because they have appreciated or because you've held them for a long time.
  • "Of Wall Street maxims the most foolish may be 'You can't go broke taking a profit.'"
  • Be content holding securities indefinitely as long as the business fundamentals remain sound and the market doesn't overvalue the business.