50 years of wisdom summarized in one mere book by Professor Lawrence Cunningham. Its widespread popularity comes from Buffett’s extraordinary wisdom, and being able to convey it in a manner that is simple for readers to read and understand. One of the wisest to have lived, it would be remiss to not glean some knowledge from a book that many consider a must read for those under the age of 30 and starting out life.

-you must be contrarian and right, not just contrarian. Otherwise, that is as foolish as following the crowd.

-banks are heavily leveraged (20 to 1 in some instances). Thus, assessing management is crucial, and there are major differences between the banks due to quality of management

-only work with people that you like, trust and admire. Attempting to Form a Beneficial Agreement with an Unscrupulous Person Is Challenging

-it is better to avoid dragons than to slay them

-Fools Provide Justifications, While Wise Individuals Abstain

-Warren prefers certainty of a good result over the potential of a great result

-high return businesses need little capital

-an investor needs to do very few things right as long as they avoid big mistakes

-no prediction on stock markets, interest rates, business activities a year from now

-If You Intend to Save More Over the Next Five Years, You Should Actually Hope for a Decline in the Stock Market, Not a Rise

-selecting good people who are able, honest and diligent is more important than creating concrete hierarchies

-it is better to be approximately right than precisely wrong

-someone who actively trades in the market and is called an investor is like saying someone who has one-night stands is a romantic

-avoid herd thinking

-Buffett is against stock splits. They increase share turnover and thus transaction costs, they attract more speculators, they often lead to prices that are different from intrinsic value

-the best businesses can be run like franchises, pricing power and low cost to operate or maintain.

-most business acquisitions are value decreasing

-a bird in the hand is worth two in the bush

-Accounting Goodwill Diminishes Over Time Due to Amortization. Conversely, Economic Goodwill, Often Stemming from Brand Strength and Pricing Power, Tends to Augment.

-cashflow usually overstated as future requires more capital expenditure for operating and expanding purpose. Especially true for companies with lots of tangible assets

-if you treat people a certain way, you may be treated the same way as well

-98% of Berkshire shares don’t change hands year to year

-to finish first, you must first finish.

-does not like debt, will not take on too much debt, even losing out on good opportunities. If take on debt, likes long term fixed rate

-retained earnings, book value, is what matters to Warren and to the company in the long-run. If book value isn’t going up, then the company is destroying value. If $1 retained earnings can generate more than $1, then it is worth it

-putting investment in bad industries is the same as struggling in quicksand

-the CEO who misleads others in public may mislead himself in private

-no earnings guidance’s

-talk about investment philosophy but not about individual investment ideas. While Our Transparency Policy is Upheld, We Will Address Marketable Securities Activities Only as Mandated by Law. Valuable Investment Notions, Like Sound Product or Business Acquisition Concepts, Are Scarce and Vulnerable to Competitors. As Such, We Will Refrain From Discussing Our Investment Ideas.

-Less Than 5% of Sizeable Corporations Can Consistently Achieve 15% Yearly Earnings Growth over 10 or 20 years. Consequently, the Emphasis Should Be on Selecting Small Companies

-EBITDA is nonsense; depreciation is a real expense as the cash is already paid upfront

-be suspicious of companies that have unintelligible footnotes, and who provide outlandish growth forecasts. Those who try to make the numbers may end up making the numbers

-directors often are yes men who need the money

-False Group Think Arises When People Converge; Nurturing Independent Thought Is Crucial, and It’s Often More Attainable on an Individual Basis

-thus, most directors add no value or actually negative value

-only chance is for large funds to hold the CEO accountable. As an investor, invest in companies where the CEO is the founder and actually wants to make real change rather than being there just to make money

-you can work with a dozen managers if they have high character. However if one person is deceitful, inept or uninterested, one person is too difficult to handle

-thus, work only with people whom you like AND admire. This ensures best chance of good results and a good time. Don’t be around those who make your stomach churn, or those who marry for money. It’s a bad idea under any circumstance

-invest in good industries; the best company in a mediocre capital-intensive industry is still not worth it. If you find yourself in a sinking ship, it is better to devote your energy to leaving that ship than it is to repair that ship

-stock options provide no holding risk to management as they don’t care about retained earnings. In fact, use buybacks that don’t improve the company to inflate stock price to exercise options. So, CEO pay goes nuts

-if you can’t tell whose side someone is on, then they are not on your side

-zero-coupon bond craze; issuer can issue infinitely as they don’t need earnings or cashflow since no interest is being paid. Borrower can record non-cash earnings from these bonds issued. Longer term both sides get destroyed by the fiends of Wall Street pushing this nonsense to the public

-you don’t have to make it back the way you lost it

-regulation keeps competitors at bay, and costs can be high; but, with deregulation in commoditized industries, if one’s costs cannot keep up with low-cost operators, disaster abounds

-avoid preferred shares

-When an issue arises, be it related to personnel or business operations, immediate action is imperative

-American currency will continue to devalue and the trade deficit results in wealth leaving the country to those offshore countries (China). This leads to Americans being slaves to foreign ownership just to pay debt; and Americans becoming poorer and poorer

-the rest of the world is practising mercantilism against the US

-if the trade deficit becomes a trade surplus, then the US currency appreciates. So right now, the Chinese yuan should continue to appreciate

-insane home lending spree with bad credits fueled the housing boom

-investors lose from too much activity, taken by commissions, advisers, and taxes

-want low turnover of Berkshire shareholders, not high

-corporate acquisitions are usually overpayments

-sell the weeds not the flowers

-practise doesn’t make perfect; practise makes permanent

-we’ve observed many kisses but very few miracles

-things are seldom what they seem

-clean acquisitions; no long agreements or footnotes or other fees or directives added in by other people

-Cinderella at the ball; avoid overstaying the ball, for this leads to pumpkin and mice. This applies to overvalued speculative companies

-is the company making money off of you or for you?

-in the long term a company’s book value change is going to be closely aligned with intrinsic value. Book value is now not as relevant given the changing landscape

-economic goodwill is worth more than tangible assets; hard to measure, must be based on value people put on the companies’ goods and services

-Accounting goodwill is not the same as economic goodwill

-accounting is an aid to business thinking, not a substitute for it

-the black Scholes pricing model prices in volatility. As volatility increases, so do premium prices. Volatility is not related to a company’s fundamentals, so sell options when premium is high. Black Scholes tends to overstate the value of longer-term options.

Disclaimer

This is not Financial Advice. This article is meant only for educational and perhaps entertainment purposes.