Uncertainty is the friend of the buyer of long-term values

I am half way with this excellent book, The Warren Buffett Portfolio by Robert G. Hagstrom. Here are some of the most popular highlights by Kindle users from amazon.com for this book.

Loved the idea of viewing building a portfolio to building a company!!

Buffett does not adjust the discount rate for uncertainty. If one investment appears riskier than another, he keeps the discount rate constant and, instead, adjusts the purchase price.

Review annual reports from a few years back, paying special attention to what management said then about strategies for the future. • Compare those plans to today’s results: How fully were they realized? • Compare the strategies of a few years ago to this year’s strategies and ideas: How has the thinking changed? • Compare the annual reports of the company you are interested in with reports from similar companies in the same industry. It is not always easy to find exact duplicates, but even relative performance comparison can yield insights.

Buffett tells us that, in a low-interest-rate environment, he adjusts the discount rate upward. When bond yields dipped below 7 percent, Buffett adjusted his discount rate up to 10 percent. If interest rates work themselves higher over time, he has successfully matched his discount rate to the long-term rate. If they do not, he has increased his margin of safety by three additional points.

“The goal of each investor,” says Buffett, “should be to create a portfolio (in effect, a `company’) that will deliver him or her the highest possible look-through earnings a decade or so from now.”

“Charlie and I let our marketable equities tell us by their operating results-not by their daily, or even yearly, price quotations-whether our investments are successful,” explains Buffett. “The market may ignore business success for a while, but it eventually will confirm it.”

“Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we’re trying to do,” says Buffett. “It’s imperfect, but that’s what it is all about.”

“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”

“Face up to two unpleasant facts: the future is never clear and you pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long-term values.”

“Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher, five, ten, and twenty years from now,” explains Buffett. “Over time, you will find only a few companies that meet these standards-so when you see one that qualifies, you should buy a meaningful amount of stock.”

Warren Buffett applies three tenets about a company’s management: (1) rationality, (2) candor, and (3) resisting the institutional imperative.

And then there was this mention of uncertainty, how could I resist?🙂

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