Even great businesses (e.g. BYD) can become overvalued—if you still believe in the long-term fundamentals, expect short-term glitches and stay the course.
The cheaper the entry price relative to intrinsic value, the larger your margin of safety; once you’ve paid up, patience—not headstrong buying—is your best defense.
Speculating in Commodities Is a Tough Game
If you can reliably predict oil (or any commodity) prices, you shouldn’t be running complex businesses—you’d just sit in a room trading commodities.
Instead, focus on productive assets (railroads, insurers, manufacturers) where you can identify durable competitive advantages.
Don’t Hedge Commodities at the Parent Level
Berkshire’s policy is to let its operating subsidiaries hedge their own commodity exposures—but the parent company doesn’t try to “guess” oil, copper, or cotton prices.
If you think you can forecast a commodity’s direction over the next year, odds are you don’t have an edge; better to invest in businesses you understand.
Align Incentives by Making Stakes Meaningful
CEOs of systemically important firms should have “skin in the game” on both the upside and downside—ideally risking personal wealth if their firms become “too big to fail.”
Executive comp in companies you’d never sell should be tied to real value creation, with option strike prices set at pre-deal intrinsic values.
Maintain a Chief Risk Officer Mindset
Always ask yourself: “Could any one event or business I own blow up Berkshire?” If so, rethink the bet.
It’s better to earn low single-digit returns on float safely than chase outsized returns through leverage or exotic derivatives.
Don’t Let Past Deals Blind You to New Opportunities
Resist the trap of comparing every new deal to your absolute best—your goal is to do the best you can today, not beat your own record.
Market conditions and opportunity costs change, so treat each acquisition as a standalone decision.
Evaluate Businesses on Tangible Returns, Not Goodwill
When judging a business’s quality, look at pre-tax returns on net tangible assets—goodwill obscures the real economics.
When judging your capital allocation, include goodwill paid (i.e. the full purchase price) to see whether you truly earned a satisfactory return.
Be Skeptical of Long-Term Projections
Formal multi-year earnings forecasts carry a false precision; people with projections tend to assume constant growth even in downturns.
Instead, build mental models with plausible ranges—focus on the reliability of the business, not a spreadsheet’s line items out to year 10.
Keep Powder Dry—Cash Is a Strategic Asset
Short-term rates may be miserable, but Treasury bills give you instant firepower when attractive deals pop up (e.g., pipeline buyouts on weekends).
Never chase extra basis points with commercial paper or fancy instruments if it compromises your ability to move quickly on big opportunities.
Commit to Lifelong Learning Through Reading
Communication skills—orally and in writing—are the foundation of persuading, negotiating, and understanding complex businesses.
Read widely and deeply (annual reports, books, newspapers); even if you’re not fast, consistent reading compounds your knowledge over decades.
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