This is second in the series of articles about my learnings from Warren Buffet’s annual letters to Berkshire Hathaway. Read Part 1 here.

Investor Behavior

• When investing, we need to view ourselves as business analysts, not as market analysts, macro-economic analysts, and not even as security analysts.
• As ‘bandwagon investors’ join any party, they create their own  truth – for a while.
• An investor’s performance is determined not by what they know but how realistically then can determine what they don’t know. Define your circle of competence and operate well within it
• Be fearful when others are greedy and be greedy when others are fearful
• An investor should couple good business judgment with ability to insulate his thoughts contagious market behavior
• The most important motto when investing is to maintain ‘Margin of Safety’
• Investors should calculate ‘look through earnings’ – underlying earnings attributable to the shares they hold in their portfolio. Investors should target high look through earnings 10 years from now, thus forcing themselves to think about long term business prospects

Retained Earnings & Stock Splits

• If a fine business is selling in market at lower than intrinsic value, the most profitable use of retained earnings is repurchase of its own shares
• The value of retained earnings to owners of that business are determined by how effectively those earnings are used. Business should generate at least $1 of market value for every $1 of retained earnings
• When the stock of a company is split or any other such action is taken, focusing more on stock price than business value, then the entering class of buyers are inferior to existing class of buyers