Buffet's Investment Philosophy Essay

1346 Words Aug 18th, 2008 6 Pages
Assessment of the eight major elements of Buffet's investment philosophy:

1 Economic reality, not accounting reality.

Analysis:

One tends to agree with Buffett on this philosophy.
Accounting is a product of many estimates and judgments. It is essentially a rear-view mirror, looking back at what has happened. To add to the problem the view changes with each new accounting period.
In contrast the economic reality is the view through the windshield at what lies ahead. It consists of intellectual property, creativity, know-how and the network of production and distribution systems. The brands and trademarks of a business are the symbols of the economic reality – symbols that indicate the reputation of the company. The
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Diversification is a basic principle in investing the idea being that since you cannot possibly know beforehand which stocks will perform better or worse than the average, you cannot afford to put all of your money into one company, or even in companies within a single industry. One resorts to diversification to spread the risk -- and opportunity. The average returns are obtained by diversifying.

Buffett challenges the conventional wisdom regarding diversification. He argues that holding a few good stocks is far more important than spreading funds across a broad number of stocks. It is a fact that investors have been so oversold on diversification that the fear of having too many eggs in one basket has caused them to invest very little into companies about which they thoroughly know and far too much into others about which they know nothing at all. It is a dangerous thing to do as buying a company without sufficient knowledge may turn out to be even more dangerous than having adequate diversification.

7 Investing behavior should be driven by information, analysis, and self-discipline, not by emotion or ‘hunch.’

Analysis:

One agrees with Warren Buffet when he advocates that it is essential to use intellect – not emotion – when investing.
As an investor one needs to be immune to the emotions of greed and fear. In a bull market people fall victim to greed. They are afraid that if they don't sell

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