More than a year back, I came across this lesson from Buffett in one of his annual meetings.
It forever changed the way I sized my positions.
My portfolio returns improved thereafter:
It forever changed the way I sized my positions.
My portfolio returns improved thereafter:
“When we look at the future of businesses we look at riskiness as being sort of a go/ no-go valve.
If we think that we simply don't know what's going to
happen in the future, that doesn't mean it's risky for everyone.
It means it's risky for us.
If we think that we simply don't know what's going to
happen in the future, that doesn't mean it's risky for everyone.
It means it's risky for us.
In that case, we just give up.
We don't try to predict those things.
We don't say, "Well, we don't know what's going to happen. Therefore, we'll discount some cash flows that we don't even know at 9% instead of 7%.
We don't try to predict those things.
We don't say, "Well, we don't know what's going to happen. Therefore, we'll discount some cash flows that we don't even know at 9% instead of 7%.
That is not our way to approach it.
Once it passes a threshold test of being something about which we feel quite certain, we tend to apply the same discount factor to everything.
And we try to only buy businesses about which we're quite certain.
Once it passes a threshold test of being something about which we feel quite certain, we tend to apply the same discount factor to everything.
And we try to only buy businesses about which we're quite certain.
I don't think that you can compensate for that by having a higher discount rate and saying:
“Well, it's riskier. And I don't really know what's going to happen.
Therefore, I'll apply a higher discount rate."
“Well, it's riskier. And I don't really know what's going to happen.
Therefore, I'll apply a higher discount rate."
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