Guarantees Matter: When depositors doubt your solvency, even a fundamentally healthy bank can crumble—explicit government backing of deposits transforms “run risk” into mere “fear risk.”
Keep Dry Powder: Holding ample cash/T-bills (Berkshire: ~$128 B) isn’t “inactive”—it’s insurance against a sudden freeze in the banking system.
2. Align Incentives and Enforce Accountability
Punish Mismanagement: CEOs and directors who load up on reckless, off-balance-sheet risks (e.g. ultra-long fixed mortgages at First Republic) must face career and financial consequences.
Reward Sound Stewardship: High returns with low volatility (think old-school regional banks that avoid speculative CDOs) merit extra autonomy and compensation.
3. Pick Your Bank Stakes Sparingly
Know Your Counterparty: Buffett stuck with Bank of America because he trusts its management—he sold other banks when uncertainties mounted.
Size Matters: Even at big discounts, Buffett won’t chase dozens of small bank bets—he’ll concentrate where he has conviction and “rolls the cash” in Treasury bills otherwise.
4. Inflation Is Everyone’s Hidden Tax—Hedge with Human Capital
Skills Over Savvy: No commodity outperforms a unique skill set—doctors, lawyers, artisans command real, inflation-proof pricing power.
Beware Cash & Bonds: Even “risk-free” bonds and cash get “swindled” by inflation over time; focus on businesses that can raise prices without over-investing in new capital.
5. Cultivate a Culture of Truthful Accounting
Ban Earnings Forecasts: Regular guidance becomes an endless cycle of gaming and cover-ups—better to focus on actual results than quarterly promises.
Transparent Mark-to-Market: Know what you own at fair value on your balance sheet—just don’t let the daily “paper P/L” distort your long-term view.
6. Use “Arbitrage” Judiciously—Limited Upside, Material Downside
Workouts vs. “Arb”: Buying Activision post-takeover announcement is appealing only if you’re confident the deal closes—profits cap at the spread, but losses can dwarf them if it fails.
Pick Your Spots: Buffett only rarely “dabbles” in these event-driven trades—save them for irresistible spreads on large, well-financed acquirers.
7. Favor Productive Assets Over Pure Speculation
Farmland vs. “Magic” Tokens: You’d pay up for 1% of U.S. farmland because it grows crops—bitcoin “grows” only through the next greater-fool bid.
Government-Backed Money Wins: The dollar remains the sole global reserve currency; true money must deliver stable purchasing power or an interest-based return.
8. Leverage Insurance Float—Cost-Free Capital with Discipline
Float Is a Loan: Premiums held before claims—if underwritten profitably—become an interest-free deposit you can invest elsewhere.
Underwriting Wins: Berkshire’s float wouldn’t exist if they’d mispriced risks—float only pays when you price losses correctly and maintain reserve strength.
9. Buy Back Shares Only When They’re Mispriced
No Formula, Just Value: If stock trades well below your own intrinsic-value estimate, repurchase; otherwise conserve capital for acquisitions.
Best Use of Excess: Berkshire would prefer a $50 B acquisition to a $50 B buyback—only repurchase when it makes shareholders demonstrably better off.
10. Treat Capital Allocation as Your “Canvas”
Think Like an Artist: View each deployment—acquisition, buyback, new investment—as a brushstroke on an ever-expanding painting of your company’s future.
Learn & Adapt: Don’t stick to one style—if a given stroke (“investment”) misfires, paint over it swiftly; but double-down where your “vision” pays off.
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