Choose wisely. There is only one correct answer to each question.
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1.
A margin of safety is _______.
The difference between a company's estimated fair value and its stock price (where the price is lower than the fair value). Since no intrinsic value calculation is perfect, Buffett requires a satisfactory margin for error before he makes an investment.
2.
Warren Buffett believes that he has never made a good deal with bad people.
True. Though the economics of a business is the most important factor, Buffett believes it's important to work with competent, honest managers.
3.
Warren Buffett prefers to invest in companies that _______.
He understands. He sticks to those companies that are within his circle of competence.
4.
If a company does not have sustainable competitive advantages over others, then it is easier to estimate the value of its future cash flows.
False. It is harder, not easier, due to the unpredictability of its business.
5.
Warren Buffett takes the judgments of the market seriously when he decides whether to invest in a company.
False. Buffett prefers not to evaluate his business on the whims of the market.
6.
Warren Buffett determines a company's value by estimating the company's future _______ and discounting them at an appropriate rate.
Cash flows. Buffett, like many good investors, estimates the future cash flows and then discounts them so they are expressed in today's dollars.
7.
Warren Buffett believes that portfolio diversification _______.
Probably increases risk for informed investors by diluting the effect of their top choices, the companies with the least risk and highest potential returns. Buffett rejects the idea that diversification is helpful to informed investors. He thinks the additional investment into your best ideas is likely to yield a better result than investment into your 20th or 30th favorite company.
