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. 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.
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.
