THE UNREASONABLE INVESTOR

Having seen such mammoth success of Buffett’s performance in selecting business, why don’t other investors apply his approach? The answer force us to think that how people think about investing. When Buffett invests, he sees a business while most investors see only a stock price. Investors spend too much time and effort watching, predicting, and anticipating price changes and too little time understanding the business of which they are part owner. It is the root cause that sets Buffett way above.

While other professional investors are busy studying capital asset pricing models, beta, and modern portfolio theory, Buffett studies income statements, capital reinvestment requirements, and the cash generating capabilities of his companies.

In assessing risk, a stock analyst does not look into what a company manufactures, its customers, its competitors, or how much business is drowned with borrowed money; rather he focuses upon the price history of the stock. In Contrast, Warren Buffet will seek those information that will deepen further understanding of the company’s business. After buying a stock, Buffett would not be disturbed if markets closed for a year or two. Once a year, he checks several variables:

  • Return on beginning shareholder’s equity
  • Change in operating margins, debt levels, and capital expenditure needs
  • The company’s cash-generating ability

If investor believe that the stock market is smarter than him, then invest in index funds. But if investor has done his/her homework and understand business and feel confident that he knows more about the business than the stock market does, turn off the market.

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