Build Your Investment Framework
Warren Buffett's core investment concepts, extracted from 60 years of shareholder letters. Each concept links directly to original source material.
Valuation
Accounting Earnings vs. Economic Reality
GAAP earnings are a useful abstraction that often diverge significantly from the true economic earnings of a business.
Book Value vs. Intrinsic Value
Book value (accounting net worth) vs. intrinsic value (true economic worth); Buffett increasingly emphasizes intrinsic value as the only meaningful metric.
Cash is King
Cash flow, not accounting earnings, determines a business's ability to create value over time.
Intrinsic Value
The true underlying value of a business, determined by the discounted value of the cash that can be taken out of the business during its remaining life.
Margin of Safety
The principle of buying securities only when their price is significantly below intrinsic value, providing protection against errors and market volatility.
Owner Earnings
The true cash earnings of a business: reported earnings plus non-cash charges minus capex required to maintain competitive position.
Strategy
Asymmetric Risk
The search for investments where the upside significantly exceeds the downside, converting uncertain propositions into favorable ones.
Circle of Competence
The boundary of what an investor truly understands; staying within this circle is essential for making good investment decisions.
Derivatives as Time Bombs
Complex financial instruments that Buffett has repeatedly called 'weapons of mass destruction' due to their hidden leverage and systemic risks.
Diversification vs. Concentration
The tension between the risk-reduction benefits of diversification and the wealth-creation benefits of concentrated positions in high-conviction investments.
Index Fund
A low-cost fund that tracks a market index, offering most investors superior long-term returns versus active management.
Long-Term Holding
The strategy of buying excellent businesses and holding them indefinitely, allowing compounding to work over decades.
Opportunistic Investing
The practice of being patient and waiting for high-conviction opportunities when market conditions create extraordinary prices.
Insurance
Insurance Float
The premiums collected by an insurance company before claims are paid, which can be invested at no cost until needed.
Ring of Fire
Berkshire's reinsurance operations that spread catastrophe risk across multiple insurers, generating large premium income with statistically favorable outcomes.
Philosophy
Owner Thinking
The mindset of treating stock investments as owning partial interests in businesses, not trading tickets — a fundamental philosophical shift that separates investors from speculators.
The Intelligent Investor
An investor who uses reason and discipline to exploit market irrationality, rather than being controlled by emotion.
The Miracle of Compounding
The exponential growth of wealth achieved by reinvesting earnings, producing outsized returns over long periods.