Warren Buffett

Quotes are word for word from the source.

• Share Issuance

  “When we issue shares in a merger, we reduce your ownership in all of our businesses -- partly-owned companies such as Coca-Cola, Gillette and American Express, and all of our terrific operating companies as well.”

  Our noteIssuing shares for mergers dilutes the ownership value of existing shareholders across all underlying businesses.

• Capital Allocation

  “we find nothing particularly noteworthy in a management performance combining, say, a 10% increase in equity capital and a 5% increase in earnings per share.”

  Our noteEarnings growth that lags behind the increase in equity capital does not represent impressive management performance.

• Compound capital deployment

  “At Berkshire, we particularly favor the rare enterprise that can deploy additional capital at high returns in the future. Owning only one of these companies - and simply sitting tight - can deliver wealth almost beyond measure.”

  Our noteBuffett describes the ideal business model for long-term wealth creation.

• Currency forecasting limits

  “Neither Greg nor I believe we can forecast market prices of major currencies. We also don't believe we can hire anyone with this ability.”

  Our noteExplaining why Berkshire hedges its Japanese investments with yen-denominated debt.

• Customer price advantage

  “Our goal, however, is not to widen our profit margin but rather to enlarge the price advantage we offer customers.”

  Our noteBuffett emphasizes prioritizing long-term competitive advantage over short-term profit margins.

• Book vs intrinsic value

  “Book value tells you what has been put in; intrinsic business value estimates what can be taken out.”

  Our noteBuffett distinguishes between accounting measures and the actual economic value of a company.

• Value through content

  “Properly written and edited, a full serving of news makes our paper more valuable to the reader and contributes to our unusual penetration ratio.”

  Our noteBuffett explains why the Buffalo News maintains a high percentage of editorial content compared to ads.

• CEO Capital Allocation

  “If a CEO can be expected to do this job well, the reinvestment prospects add to the company's current value; if the CEO's talents or motives are suspect, today's value must be discounted.”

  Our noteThe importance of management's ability to deploy retained earnings effectively.

• Hiring Passionate Leaders

  “Many of our CEOs are independently wealthy and work only because they love what they do. They are volunteers, not mercenaries.”

  Our noteThe motivation of the managers who run Berkshire Hathaway's diverse businesses.

• Capital Allocation Limits

  “Most companies limit themselves to reinvesting funds within the industry in which they have been operating. That often restricts them, however, to a "universe" for capital allocation that is both tiny and quite inferior”

  Our noteThe disadvantage of companies that only reinvest within their own narrow industry.

• Incentive structure design

  “We want a compensation system that pays off big for individual success but that also fosters cooperation, not competition.”

  Our noteBuffett explains the logic behind the compensation structure for Berkshire's investment managers.

• Investment style flexibility

  “At Berkshire our only style box is "smart.”

  Our noteBuffett rejects rigid industry categories for investment managers in favor of general intelligence.

• Capital Allocation Goal

  “When managers are making capital allocation decisions - including decisions to repurchase shares - it's vital that they act in ways that increase per-share intrinsic value”

  Our noteBuffett emphasizes the primary responsibility of management when deploying company cash.

• Timing of mistakes

  “Mistakes occur at the time of decision. We can only make our mistake-du-jour award, however, when the foolishness of the decision become obvious.”

  Our noteBuffett discusses how investment errors are made at the start but realized much later.

• Active management failure

  “The problem simply is that the great majority of managers who attempt to over-perform will fail.”

  Our noteBuffett discusses the difficulty of finding investment managers who can consistently beat the market.

• Nature of Insurance

  “Insurance companies offer standardized policies which can be copied by anyone. Their only products are promises. It is not difficult to be licensed, and rates are an open book.”

  Our noteBuffett explains why the insurance industry lacks traditional competitive moats like patents or location.

• Acquiring Quality Assets

  “We will continue, however, to acquire quality brokerage operations when they are available at sensible prices.”

  Our noteBuffett discusses his strategy for HomeServices despite a terrible year for home sales.

• CEO as Risk Officer

  “I both initiated these positions and monitor them, a set of responsibilities consistent with my belief that the CEO of any large financial organization must be the Chief Risk Officer as well.”

  Our noteBuffett explains why he personally manages Berkshire's derivatives portfolio.

• Benefits of Float

  “If we break even on an underlying transaction, we will have enjoyed the use of free money for a long time.”

  Our noteBuffett describes the advantage of receiving premiums upfront in derivatives contracts.

• Avoid small commitments

  “If something's not worth doing at all, it's not worth doing well”

  Our noteBuffett explains why Berkshire avoids small investments and focuses on significant opportunities.

• Desperation pricing

  “insurers with large holdings of bonds valued, for accounting purposes, at nonsensically high prices would have little choice but to keep the money revolving by selling large numbers of policies at nonsensically low prices.”

  Our noteHe describes how poor balance sheets force companies to chase cash flow at any cost.

• Friendly Acquisitions Only

  “At Berkshire, we go only where we are welcome.”

  Our noteBuffett states Berkshire's policy against hostile takeovers.

• Proven earning power

  “Demonstrated consistent earning power (future projections are of little interest to us, nor are "turnaround" situations”

  Our noteBuffett lists the criteria for businesses Berkshire Hathaway is interested in acquiring.

• Ignoring Academic Pedigree

  “I never look at where a candidate has gone to school. Never! Of course, there are great managers who attended the most famous schools. But there are plenty such as Pete who may have benefitted by attending a less prestigious institution”

  Our noteBuffett explains his criteria for selecting CEOs and managers.

• Pricing Discipline

  “We must never write inadequately-priced policies in order to stay in the game. That policy is corporate suicide.”

  Our noteBuffett explains why maintaining pricing integrity is more important than maintaining market share in insurance.

• Betting on America

  “Charlie and I have always considered a "bet" on ever-rising U.S. prosperity to be very close to a sure thing.”

  Our noteBuffett reflects on the long-term economic optimism that drives Berkshire's major investments.

• Market Sentiment

  “A climate of fear is your friend when investing; a euphoric world is your enemy.”

  Our noteBuffett explains how to view market fluctuations and investor emotions.

• Investing in people

  “Betting on people can sometimes be more certain than betting on physical assets.”

  Our noteBuffett emphasizes trusting extraordinary managers even when he doesn't fully understand the technical manufacturing details.

• Dangers of Debt

  “There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren't immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary.”

  Our noteWarning against using borrowed money to buy stocks because of psychological pressure during market crashes.

• Beyond Simple Ratios

  “Sometimes there is more to stock valuation than price-earnings ratios.”

  Our noteBuffett reflects on the Rockwood & Co. deal where asset value mattered more than earnings.