The Moat Around the Castle: Warren Buffett's Timeless Investment Wisdom
Warren Buffett's Investment Best Practices
Based on Buffett's 1986 letter to Berkshire Hathaway shareholders, here are his key investment principles:
Focus on Business Fundamentals
- Seek businesses with "excellent economics, run by talented, high-grade" managers who love what they do
- Look for companies with strong market positions, high returns on capital, and outstanding management
- Avoid businesses requiring significant additional capital to maintain competitiveness
Acquisition Criteria
- Large purchases (at least $10M in after-tax earnings)
- Consistent earning power (not future projections or turnarounds)
- Good returns on equity with little or no debt
- Management team already in place
- Simple businesses without complex technology
- Clear offering price
Long-Term Ownership Perspective
- Hold onto great businesses permanently rather than trading actively
- Work with people you like and admire - this maximizes chances for good results
- The "activity" mindset prevalent in corporate America and investment management is often counterproductive
Market Psychology & Timing
- "Be fearful when others are greedy and greedy only when others are fearful"
- Recognize that fear and greed periodically sweep through markets
- Don't try to time these swings, but be prepared to act when opportunities appear
Capital Allocation
- Proper capital allocation is crucial to long-term success
- Shareholders' interests are best served when excess capital is deployed in businesses with excellent economics
- Be willing to hold cash when attractive opportunities aren't available
True "Owner Earnings"
- Focus on true economic earnings rather than accounting figures
- Consider what a business can generate after maintaining competitive position and unit volume
- Be skeptical of "cash flow" figures that don't account for necessary capital expenditures
Patience & Discipline
- Be willing to wait for the right opportunity rather than compromising standards
- Recognize that "no deal" is better than a mediocre one
- Maintain rational expectations about future returns as size increases