There's a lot of good stuff in this wonderful post. If you have any interest at all in investing in publicly traded securities I suggest a read:
How can the mindset of chief capital allocator help you distinguish between value and price? If you were in charge of allocating capital around the world, you wouldn’t be able to rely on the market to bail you out of bad investments. The greater fool theory of someone buying your shares at a higher price breaks down if the buck stops with you. Successful investors believe their return will come from the investee company’s return on equity rather than from sales of stock. This mindset produces a very different process of estimating value than if you rely on the market to establish value and then try to gauge whether a company was likely to beat or miss consensus earnings estimates.On Buffett:
Investment professionalization has had unintended consequences, as the ultimate owners of capital (households and endowments) have become increasingly detached from security selection. Short term-oriented “security holders,” such as mutual funds and hedge funds, have displaced long-term “owners.” The results have been a greater tendency to choose portfolios that reduce occupational risk rather than investment risk, increased trading mentality, and less participation in company affairs. As Vanguard founder John Bogle points out, “The old own-a-stock industry could hardly afford to take for granted effective corporate governance in the interest of shareholders; the new rent-a-stock industry has little reason to care.”
[...] Buying businesses cheaply has not generated his long-term returns -- it has merely accentuated them.It's not all theory... it pulls together a lot of practical stuff.
Buffett raised eyebrows in the investment community many years ago when he bought Coca-Cola at a mid teens multiple of earnings. Most value investors couldn't understand why Buffett considered it a bargain purchase. Of course, Buffett was allocating capital to a superior business at a fair price. He knew that Coca-Cola would compound the capital employed in the business at a high rate for a long time to come. Buffett did not need P/E multiple expansion to make the investment in Coca-Cola pay off.