“Too big to manage” means too big to trust: If you can’t fully grasp your firm’s exposures—even under extreme but plausible scenarios—you’re running unacceptable risk. Buffett insists on “none” rather than “slim” chance of ruin.
Chief Risk Officer mindset: He sees himself as Berkshire’s CRO; risk management can’t be delegated to committees or opaque models promising “once-in-a-lifetime” safety.
2. Skip endless due diligence when value is obvious
Simple “fatness” test: If a company’s intrinsic value is many multiples above its market price (e.g. PetroChina at ~$100 B vs. $35 B), detailed micromanagement adds no insight—buy.
Avoid precision traps: If you need three-decimal accuracy to decide, the idea isn’t a “fat” opportunity. Buffett moves only when the margin is so wide that further analysis is wasted.
3. Value speed and decisiveness
Five-minute filter: If Buffett can’t decide within minutes whether an opportunity is in his circle of competence, he won’t spend months—it simply won’t pan out.
Be ruthlessly selective: He “rules out” entire swaths (startups, complex derivatives, unfamiliar fields) so he can act instantly on what remains.
4. Pay dividends only when no better use exists
Retain only if ROI > 1×: Every dollar retained must generate more than a dollar in present-value market value; otherwise it should be distributed.
Match payout to business needs: Operating subsidiaries (like See’s Candy) pay out all excess earnings; Berkshire holds capital centrally to redeploy where it earns best.
5. Build a fortress balance sheet over chasing extra returns
Focus on avoiding ruin: Buffett trades off some upside in exchange for near-zero “tail risk”—better to earn a reasonable return without jeopardy than chase outsized gains with leverage.
Double-layered protection: High credit standing (so borrowing isn’t needed) plus ample liquidity that would keep the company running smoothly even if funding markets froze.
6. Understand what you own—lump non-specialized cases
Group approach when no edge exists: In areas like big pharma, where individual pipelines are unpredictable, buying a basket of well-priced names makes sense.
Pick individual when you do know: Conversely, in banks or consumer brands, Buffett studies management DNA and moat quality one by one—never lump them all together.
7. Seek managers with DNA averse to hidden risks
Genetically risk-programmed leaders: Buffett’s heir-apparent criteria: integrity + analytical savvy + a nose for unmodeled perils.
Resist groupthink: High-powered teams chase yield and ignore low-probability blow-ups; Buffett looks for CEOs who say “no” when others shout “yes.”
8. Cultivate a long-term, decentralized culture
Simple process, big commitment: At Berkshire, a direct “yes” means funding will show up—no “material adverse clauses” or 100 lawyer memos—so partners trust the outcome.
Preserve autonomy & alignment: Subsidiary managers keep control over operations and capital, incentivized to think like owners.
9. Don’t let cleverness mask absurdity
Beware of “financial mass destruction”: Complex CDO² or synthetic instruments are often so convoluted that valuing them requires reading half-a-million pages—Buffett labels that “madness.”
Fair-value discipline: Even imperfect market marks force transparency; booking assets at cost or fanciful models invites hidden losses and systemic surprise.
10. Keep your circle of competence small and focused
Say “no” early and often: Buffett and Munger bluntly cut off pitches as soon as they know it’s outside their scope—saving time and mental bandwidth.
Expand your arena selectively: They only add industries where they can genuinely understand the economics, not just chase hot trends.
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