1 Economic reality, not accounting reality.
One tends to agree with Buffett on this philosophy.
Accounting is a product of many estimates and judgments. It is essentially a rear-view mirror, looking back at what has happened. To add to the problem the view changes with each new accounting period.
In contrast the economic reality is the view through the windshield at what lies ahead. It consists of intellectual property, creativity, know-how and the network of production and distribution systems. The brands and trademarks of a business are the symbols of the economic reality – symbols that indicate the reputation of the company. The …show more content…
Fear is equally dangerous. If one has a portfolio of stocks which has fallen in value one is driven by fear to sell in a panic. But one should try to analyse why one holds the investment in the first place. If the company still seems sound, one should consider the possibility that it may be a victim of a bear market and hold on to shares a little longer. However, if the stock has lost value because of the company itself, maybe it is time to cut losses and sell.
No one can time the market perfectly. It is important to develop a financial strategy that doesn't depend on timing.
8 Alignment of agents and owners
One agrees with Buffett when he talks of alignment of agents and owners. However it is not easy to align them. Large corporations have hundreds of thousands of shareholders and it is impossible to have the "owners" manage the business directly. This separation of ownership and management is also a necessity as it allows for continuity in management unaffected by changes in ownership. It also facilitates the hiring of professional managers to manage the business.
But the separation of ownership and management causes potential principal-agent problems causing business to incur agency costs. Agency costs are the costs incurred when managers do not act in the interests of the stockholders and their actions need to be