"It does not make any difference; large cap, small cap, giant cap, micro cap, medium cap. All that matters is that we understand the business, we like who is running it and it is selling at a price that is attractive."
This clip briefly talks about the prospects of large caps versus small caps. As the quote indicates above, Warren Buffett stated that they pay no attention to the market cap of the company with regards to one cap outperforming the other. It makes no difference. When they look at businesses, they ask three (3) questions:
1. Do we understand the business?
2. Do we like the people running it?
3. Is it selling at a price that is attractive?
As you can see, this is consistent with his basic investment philosophy.
"The cap does not make a difference; it is the certainty of the business that counts."
I thought it best to reiterate the basic principles upon which Warren Buffett's philosophy lies. Given the current conditions of the economy, we cannot hear the basics enough to keep us focused.
1. Buy a business you understand.
2. Buy a business with favorable long-term prospects.
3. Buy a business operated by honest and competent people.
4. Buy a business available at a very attractive price.
As another one of my favorite investers, Bruce Berkowitz, said "Ignore the crowd"; this is what we should do in this environment. We know that the market is driven by sentiment and emotions, therefore stick to your underlying philosophy and do not pay attention to the noise in the market. Like the ocean when the water is rough, it is difficult to see through clouded by sand; but when the water settles and the calm is restored, only then can you see things clearly. Focus on the business; ignore the extraneous details.
It was interesting how what I am about to write came about. I could not think of a way to relate this to life, but I know there is always a way. So I took a break and now the idea came through me. Have faith. You know how normally we have faith in our beliefs once everything is going well for us, but as soon as we encounter difficult times, we are tested. Why are we tested? Well, it is during those times we are the most vulnerable and there exists a high possibility of us changing or relinquishing our belief systems. Just as this very volatile market condition or challenging economic environment has impacted most of the investors out there, we are affected in life just the same. The message I deliver is when the times get tough, this is when you should focus even more on what you believe in, because ultimately, when the dust clears, your firm understanding will get you through and all those that panicked would have missed the opportunity.
Warren Buffett MBA Talk | Part 1: Integrity
Warren Buffett MBA Talk | Part 2: Smart Choices
Warren Buffett MBA Talk | Part 3: Choosing Businesses
Warren Buffett MBA Talk | Part 4: Share of Mind
Warren Buffett MBA Talk | Part 5: Circle of Competence
Warren Buffett MBA Talk | Part 6: Macroeconomic Factors
Warren Buffett MBA Talk | Part 7: Inactivity & Dividends
Warren Buffett MBA Talk | Part 8: Diversification
Warren Buffett MBA Talk | Part 9: Market Cap
Warren Buffett MBA Talk | Part 10: Ovarian Lottery