Buffett believes that predicting cash flow that far out is possible for only a small subset of publicly-traded companies, that’s why he never invests in the technology sector. Who can reasonably estimate Apple, Google, or Microsoft’s cash flow in 10 or 20 years? That and other markets change too fast for such prediction to be possible.

Buffett’s huge investments in Coca-Cola and American Express (and his more recent smaller investment in Republic Services Inc.) are based on a “demographic stance,” a long-term investment approach based on the idea that everyone is going to drink fizzy drinks, own a credit card, and continue to produce more trash for the foreseeable future.

Re: 2: Illegal insider trading must involve information that is “non-public,” which itself is confusing. Think of “non-public” information as information that is company property. Information that no insider would ever give someone outside the company if it had the company’s best interest (and therefore, the company’s stockholders’ best interest) in mind.

In practice, illegal insider trading, as far as I know, almost always involves exploiting short-term swings in stock priced based on information that will be made public before it is made public. An example would be trading on quarterly earnings report data the day before that data is released.

Re 3: “Is there a metric-based guideline that is good to have (10% earnings drop, 15% price drop). How do you know when to admit your mistake and move on in a public equity investment?”

Buffett’s skill as an investor comes not just from extraordinary analysis of businesses, but also from his extraordinary analysis of businesspeople. He has extraordinary access to CEOs to make his analyses–access that you can’t get unless you have billions to invest. Everyone operates on imperfect information, but Buffett has more information than perhaps any other investor in the US market.

I think that the less information you have, the more useful (i.e., profitable) a metric becomes. In technical analysis, metrics are extremely profitable, since many small risky investment decisions are made on very little information.

If you and Buffett own a stock, and the price drops 15%, Buffett probably has a much better idea of why it happened, and what to do about it, and if he doesn’t, he can call the CEO direct and ask.

Thanks for the book review! I’d love to hear your further thoughts on those questions. They are excellent ones with no final answer in sight… the best kind!