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Best Practice: The Elimination Process and Effect

July 19, 2007
Bud Labitan

Bud Labitan

2 followers

In my last article entitled, "Best Practice: The Elaboration Effect" I attempted to tie in concepts from the practices of Warren Buffett and Charles Munger that explain why they appear immune to the convestional framing effects. Link: http://www.gurufocus.com/news.php?id=3051

This next best practice is called "The Elimination Process and Effect" Using the process of eliminating bad and mediocre businesses from investment consideration have pushed their probability of success automatically into the higher percentiles of long term investing success.

How is this done? Chiefly by performing the four filters:

1. Understand the Business and it Products.
2. Is there a Sustainable Competitive Advantage
3. Able and Trustworthy Managers
4. A Margin of Safety if the selling price is significantly below the Intrinsic Value.

In building an A.I. interactive model of WB's Investing Brain, one approach is to use probabilities and elimination. Which words have appeared most frequently in Buffett's writings to shareholders?


While this is not a complete study, this sample below shows the "word frequency" from my old compilation of the BBF, Buffett Business Factors. I will add a few comments to point out some patterns I detected. You are free to make your own comments and welcome to volunteer on the open Archabbot A.I. project mentioned below.

FREQ

WORD

COMMENT

386

business

No shocker here, the underlying business is always more important than stock's market price.

250

not

This one caught me by surprise at first until I remembered WEB talking about the importance of the human mind casting out less than desirable purchases. In the talk to MBA students in Tennessee, Buffett mentioned the reason why great chess champions can beat IBM's best supercomputers. An experienced chess champ has the ability to cast off a lot of information noise.

180

earnings

A lot of focus on real free cash flow

155

value

Ad sustainable competitive advantage therein

146

businesses

386+146 = 532 times !

141.

about

 

Apreposition meaning connected or associated with. WEB and CM have lot of experiences to form pattern comparisons

140

capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

139

their

136

no

132

its

132

has

132

when

129

more

123

all

123

one

122

investment

121

were

119

which

114

his

113

he

111

years

108

long

108

Berkshire

108

only

106

million

103

company

99

managers

There is a lot of talk in the writings about able and trustworthy managers and numerous examples

96

market

This is interesting mainly because the concept of market get mentioned so much further down this frequency list.



I came to the conclusion that if a truly smart machine interpreted the essence of the discussions portion of his shareholder letters, the conclusion would read something like this:

"Mr. Buffett focused on the importance of individual businesses and what not to value. Because of the frequent use of the words business, not, earnings, value, about, and capital, we can conclude that this piece of literature is a cautionary tale about factors to avoid when making an investment."

Therefore, it is my view that in addition to the Elaboration Process and Effect, another important Best Practice for investors is the Elimination Process and Effect.

About the author:

Bud Labitan
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 3.9/5 (11 votes)

Comments

budlab
Budlab - 7 years ago
About the open Archbot AI Modeling Project, here is the link: [www.pr.com]

... and the original code files are here:

http://home.bellsouth.net/p/s/community.dll?ep=16&groupid=64066&ck=


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