Warren Buffett is best-known for his amazing track record in the stock market, but he is also notable as someone who takes time out of his busy schedule to dispense wisdom for those willing to listen. Here are three of my favourite Buffett quotes that I believe all investors should heed.
“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”
This seems trite to the point of irrelevance. Of course investors should try to not lose money. However, there is a deeper meaning to this idea that goes beyond the trivial. Buffett’s point is that investors should primarily be concerned with minimising their downside, and not worrying too much about the upside.
Notice that this stands in contradiction to how a lot of investment advice frames the issue. We are told to think about stocks in terms of what they can give us, as opposed to what can happen if something goes wrong. And while positive thinking is of course important, I believe that the Oracle of Omaha has something here. We know that the stock market tends to compound wealth over time. Therefore, we should not be too worried about reaching for gains that we can be reasonably sure of anyway. It is far more important to conserve your initial capital, so that you do not end up playing from behind. Compound interest is a marvellous thing, but it only works if you do not lose money.
Price and value
“Price is what you pay. Value is what you get.”
This simple sentence sums up the core of what it means to be a good investor. Contrary to theories that assume all stocks are always correctly priced, it states that the current price of a stock can diverge from its intrinsic value — what it is really worth.
This is probably the most important concept that investors need to understand as it clarifies that the stock market is not just a glorified casino. Rather, it is both a voting machine (in the short term) and a weighing machine (in the long term), meaning that there are mis-pricing issues in the here and now that can be exploited, and that in the grand scheme of things, price and value should converge.
Companies that can grow
“It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.”
Value investing, as it was originally undertaken in the early 20th century by investors like Benjamin Graham and David Dodd, revolved around finding companies that traded at lower prices than the value of their tangible assets. During the Depression in the US, when valuations were low and information was hard to come by, such bargain hunting made a lot of sense. As a young investor learning at Graham’s knee, Buffett initially followed similar strategies, seeking out dirt cheap companies that he called ‘cigar butts’ — weak businesses that were on their last legs, but that had one last ‘puff’ of value left in them.
Over time, and particularly due to the influence of his business partner Charlie Munger, Buffett evolved his strategy to look for quality businesses that were selling at fair value. This philosophy led him to buy American consumer stalwarts like Coca-Cola and Gillette, among others, companies that have compounded his initial investment many times over.