We do some shorting, but very little. The problem is that shorting requires timing, which isn't my greatest strength. I would guess that for all the shorts we've done over the past 25 years we're at about a $0 profit on them.
Our primary defense against risk, though, is to only buy companies that generate or are about to generate excess free cash flow, after capital expenditures and working capital needs. When problems develop, and they will, free-cash-flow companies don't have to take on short-term strategies that are not in the long-term best interests of the company [...]
After learning some hard lessons during the financial crisis, we instituted a rule that any ratio of total assets to shareholders' equity above 2.5 to 1 is an exception, which doesn't automatically mean we won't buy it, but each individual position size will be limited and we won't ever have more than 10 percent of [...]
We lost some longtime clients during the crisis, one of which delicately referred to me as a “washed-up All-Star” as the market was going down. It's not possible to avoid it eating at you emotionally when the market is going against you. One critical thing I've learned, however, is that whenever I'm the least bit [...]
When I started in the business, a stock might move 25 cents if there was a sound reason. Today, there's too much information out there and people are misusing it. This creates short-term valuation extremes, which you should often act on. Buy and hold doesn't make as much sense when stocks are hitting price objectives [...]
I will not put more than 5 percent of the portfolio in any stock, and we usually don't have more than 2.5 percent. Early in my career I had 20 percent of my portfolio in Johnson & Johnson just before Tylenol was laced with poison. My objective is to produce an above-average, long-term return, and [...]
We care a lot more about what management is doing, which is very well documented, than what they are saying. I can learn everything I need to know about management by looking at the numbers. I can see how conservative they are. I can compare three years of shareholder letters and see if they are [...]
We sometimes buy companies with bad management, if that fact is more than accounted for in the price. At a cheap enough price on a decent business, I'm willing to ride out any problems until somebody, if not current management, figures out how to turn things around.
We analyze receivables and inventories to determine changes in each relative to changes in sales. Inventories and receivables increasing faster than sales can be early warning signs of future slowdowns. Inventories building in the right places, like raw materials and work-in-process, can be signs of future strength.
I should point out that we can go too far in our zeal to crunch numbers. We once missed a big run-up in Black & Decker because I docked them for some unfunded pension liabilities that took them something like 2 percent out of our buy range. We loved the company and loved the products [...]