Buffettisms: The Best Quips and Quotes from Everyone's Favourite Investor - Views on News from Equitymaster

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  • Mar 14, 2016 - Buffettisms: The Best Quips and Quotes from Everyone's Favourite Investor

Buffettisms: The Best Quips and Quotes from Everyone's Favourite Investor

Mar 14, 2016

Berkshire Hathaway recently released its 2015 annual report. Now, if you happen to be a value investor, this wouldn't be news to you. In fact, you would have laid your hands on it and read the report already. Being Buffett-heads, we did it too.

As always, Buffett packed a lot of wisdom in few words. Many of his thoughts gave profound views on investing subjects that are often forgotten or lost in the folly. Here's a peek at some of the thoughts he shared in the 2015 annual report...

On overpaying for a company, Buffett wrote:

  • Of course, a business with terrific economics can be a bad investment if it is bought at too high a price.

On cost-based moat, he illustrated GEICO's performance and said:

  • GEICO's cost advantage is the factor that has enabled the company to gobble up market share year after year. (We ended 2015 with 11.4% of the market compared to 2.5% in 1995, when Berkshire acquired control of GEICO.) The company's low costs create a moat - an enduring one - that competitors are unable to cross. .

On the importance of management quality, he wrote:

  • We follow an approach emphasising avoidance of bloat, buying businesses such as PCC that have long been run by cost-conscious and efficient managers. After the purchase, our role is simply to create an environment in which these CEOs - and their eventual successors, who typically are like-minded - can maximize both their managerial effectiveness and the pleasure they derive from their jobs. (With this hands-off style, I am heeding a well-known Mungerism: 'If you want to guarantee yourself a lifetime of misery, be sure to marry someone with the intent of changing their behavior.') .

Buffett shares similar bits of investing wisdom every year. It's what's earned him the title, 'Oracle of Omaha'.

Many people - ourselves included - follow Buffett's principles almost religiously, believing it will make them better investors. And so today we revisit classic Buffettisms from annual reports of years passed.

  • Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1

Here Buffett presents the mindset of a value investor. A value investor is ever conscious of what he is losing and what opportunities he is missing.

Not losing money is important because the more money you lose the harder it is to make it back. If you lose 50% of your initial investment, then your next one needs to double just to get back where you started. Even after a 100% gain, net, you would have gained nothing. Plus, during the time it takes to get back to your starting level, you miss out on the magic of compound returns. Think of this way: A rupee not earned is a rupee sacrificed.

  • The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.

To be a successful investor you should have the nerve to follow your convictions, the patience to hold your investments, and an inclination for independent thinking.

  • Only buy something that you'd be perfectly happy to hold if the market shut down for ten years.

How long should you hold a stock? Buffett's ideal holding period is forever. By which he means a long period of time. If you don't feel comfortable owning a stock for ten years, you shouldn't own it for ten minutes. Unless a company's prospects suffer a sea change, a long-term horizon will deliver the healthiest returns.

  • I try to buy stock in businesses that are so wonderful that an idiot can run them because sooner or later, one will.

The fundamentals of a business are more important than the operations of a business. According to Buffett, businesses with a strong moat will do great regardless of who runs them. And the stronger the moat, the better the businesses will perform. And the stock price will ultimately reflect the good performance of the company. When evaluating a company, moat is more important than management. If you have to worry about a fool running a business, then maybe it isn't such a great business and you shouldn't own it.

  • Be fearful when others are greedy and greedy only when others are fearful.

In stock markets, there will be many instances of 'blood in the streets' and nobody will have courage to buy. However, these are the best times to buy stocks trading below their intrinsic value.

The converse also is true. Prices can go up beyond a company's intrinsic value. Blinded by the capital flood, the market and the valuations reach unsustainable levels. Most investors will be greedy during these times, but you should be fearful and wait for the markets to depict their true levels.

  • It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

Finding the right company at the right price - and with a margin of safety - should be your goal. Profits are made when you purchase the stock. But you shouldn't buy just because the business has a durable moat. What magnifies your returns the most is the price you pay for the business. Value investors strive to buy business only when they are trading below their intrinsic value.

To do that, they consider the future and value the business they best they can. Of course, the life of a business is not predictable to a very high level of precision. Thus, they buy the business only when it is available at a price well below what they value it at currently. That difference between the price and value is the safety margin. As Benjamin Graham says, 'It is available for absorbing the effect of miscalculations or worse than average luck.'

  • The cemetery for seers has a huge section set aside for macro forecasters. We have in fact made few macro forecasts at Berkshire, and we have seldom seen others make them with sustained success.

Don't be distracted by macroeconomic forecasts. Making macroeconomic projections and getting the big picture right is one thing. But translating them into profitable stock picking decisions is a different ball game altogether. Macroeconomic events are barely a blip in the long-term intrinsic value of a company.

However, the frenzy foolish often overreact to macro events. And this is when the risk-reward equation turns in our favour, making stocks an attractive long-term proposition.

  • There seems to be some perverse human characteristic that likes to make easy things difficult.

Buffett likes to keep it simple. Finding a great business, buying it at a great price, and holding it long term is not that hard when the other market participants and stock brokerages are preaching complex strategies. Smart investors know these complex strategies are often geared to make the adviser, not the advisee, rich.

So, these were some of the Buffett quotes to think upon. And there are many similar interesting nuggets that Buffett has shared in the past. Indeed, thousands all over the world have charted out extremely successful investing track records by closely following Buffett in both letter and spirit. And we hope these quotes gave you a good head start to do the same.

For more resources on the Oracle of Omaha, you can visit our Warren Buffett page here.

Rahul Shah

Rahul Shah (Research Analyst), Managing Editor, Microcap Millionaires has led the team from the front in developing some of our most stringent and rewarding research processes. As per his own admission, the turning point in Rahul's life as a financial analyst came a few years back when he got introduced to the works of Warren Buffett and Charlie Munger. From Buffett, he understood the value of investing in good quality business with powerful moats and strong management teams. Charlie Munger on the other hand inspired him to be a lifelong learner and use mental models in order to arrive at the crux of matters across most disciplines. Rahul firmly believes that in order to be successful at investing, you have to do the big things right and possess a great temperament and a contrarian streak.


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