• project the future cash flows that the business (the asset) will produce over its lifetime (think carefully about things like declining prices due to new competition, realistic growth rates, etc.)
• discount these cash flows back to the present at an appropriate rate
• ask yourself: does it possess an economic castle (i.e. does it have good business economics) that’s surrounded by a wide moat (i.e. a durable competitive advantage)?
• is there good, honest, and able management?
• is it available at an attractive price?

Because of that, there will always be arbitrage between the two to keep it that way.

For example, BRK-A closed on Friday, July 8th, 2011 at $115,050.00, while BRK-B closed at $76.90.

Given BRK-B’s closing price, you’d expect BRK-A to be $115,350 ($76.90 * 1,500). Given BRK-A’s closing price, you’d expect BRK-B to be $76.70 ($115,050 / 1,500).

So there’s an arbitrage opportunity, albeit a small one: BRK-A is undervalued and BRK-B is overvalued.

In other words, you could short BRK-B and buy BRK-A.

[Disclosure: I own BRK-B shares.]

While Seattle isn’t in the headlines a lot, it does have a presence.

Here’s a list* of Seattle-based VC firms:

*source: http://www.vocationvillage.com/seattle-venture-capital/

One of the lesson’s stuck out to me.

3. Memories are better than material objects.

You may be surprised to learn that among the monied set, expensive cars, yachts, houses, jewelry and watches come at the end of the list.

Their priorities? Memories and accomplishments. This was especially true when it came to family. Toys matter less than good times.

The rule of diminishing returns is a harsh mistress with luxury goods. Do you really think $100,000 audio speakers sound 20 times better than a pair of $5,000 speakers? (They don’t). Is a $250,000 sports car five times faster than a $50,000? (It is not). These days, you can buy quite a lovely home for $1,000,000 (and much less in the country’s interior). Those $10,000,000 manses are not 10 times roomier. Anyone who has owned a $10,000 Rolex will tell you that a $39 Casio keeps better time.

When discussing the benefits of wealth, I have heard again and again about amazing experiences, family get-togethers, vacations, shows, sporting events, weddings and other events as these people’s most important life experiences. While these things cost money, nearly every family can afford reasonable versions of them.

Currently, a substantial part of our economy relies on the exchange of material/tangible goods. I would imagine a significant portion of those are for necessities — food, clothing, shelter, transportation, communication, etc.

But there’s some portion of the pie that gets spent on luxury goods.

Over the next fifty years, I’d bet that the tangible luxury goods market shrinks.

The primary cause won’t be because of inflation, a poor economy, or some other related issue. It’ll be because people’s spending habits will change.

I think people will spend more of their income on luxury services — such as travel, recreation, leisure, entertainment, etc. — rather than on luxury goods, because everyone (wealthy or not) is beginning to realize that good (and new) experiences with people they care about are much more fulfilling.

So, naturally, that’s where people will begin spending more of their income.

In business, I look for economic castles protected by unbreachable moats.

-Warren Buffett

During a period in which American companies have created iPhones, Home Depot, and Lipitor, the best place to work has been in an industry that doesn’t design, build, or sell a single tangible thing.

The scene is a cocktail party high above the Shanghai skyline on a summer night a few months ago. Our host is a Master of the Hedge Fund Universe, one who doesn’t want to be identified in the press. We’ll call him Pete. Pete comes to China at least twice a year to stay abreast of what’s happening in the world’s most dynamic economy. He has said, in fact, that if he didn’t have kids in school in the U.S., he would consider moving here, so bright is the future. In attendance are other hedge fund investors, venture capitalists, and fund managers, China bulls all. If there is one sure-fire way to ruin the atmosphere on such a pleasant evening, it is this: Ask the crowd what they think of the legendary short-seller James Chanos, CEO of Manhattan-based Kynikos Associates.