Warren Buffett is one of the most successful investors in the world. He is the second richest man in the world according to Forbes’s 2017 Billionaires List with a net worth of $73.4 Billion as of 17 July 2017. Since the takeover of Berkshire Hathaway 51 years ago, he has delivered an annual compounded rate of return of approximately 22% which is amazing. Without a doubt his wisdoms about investing deserves some serious attention.
I have compiled 15 Warren Buffett’s quotes that teaches about investing under the following categories and hopefully, we can all learned from him:
A) GENERAL INVESTMENT PRINCIPLES
1. “Rule No. 1: never lose money; rule No. 2: don’t forget rule No. 1”
Often people forget about this rule and they become blinded by the overall market sentiments. They invested in stocks or companies that are fundamentally poor and this causes them to lose money. No doubt the primary reason to invest is to generate returns but it is equally more important to protect your downside risk so that you don’t lose money when investing. That is why Warren Buffett always invest in companies that have durable competitive advantage that does not go out of business easily due to its wide economic moat.
2. “Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant”
Many retail investors prefer quick money, this explains why many Get-Rich-Quick Schemes emerged in Malaysia. On stock investing, they prefer to “goreng” (another word for “speculate”) not knowing that they are the victims of the pump-and-dump scheme played by some stock operators. Warren Buffett could achieve such wonderful track record is because he is discipline enough not to invest in tech stocks simply because he’s not tech savvy and this has made him avoided the Dotcom bubble crash on 20 March 2000. This brings me to my next point:
3. “Risk comes from not knowing what you’re doing.”
If you do not understand how a particular company makes money, then you should avoid investing in it. We all have our own circle of competence. If you are a doctor by profession, then you should be able to understand how pharmaceutical/ healthcare companies such as Pharmaniaga Berhad, Caring Pharmacy Group Bhd, IHH Healthcare Berhad and KPJ Healthcare Berhad, etc. operates. Most importantly, you know what is the current healthcare industry situation and is it worth investing in it. Again, your downside risk is protected when you invest within your areas of expertise. Do you agree that if you invest in something that you do not have knowledge in, the risk of losing money would be higher?
Warren Buffett actually said this:
4. “What an investor needs is the ability to correctly evaluate selected businesses. Note that word ‘selected’: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.”
B) HOW TO IDENTIFY GOOD COMPANIES
5. “Buy a stock the way you would buy a house. Understand and like it such that you’d be content to own it in the absence of any market”
There is a saying that women are better investor than men because they likes shopping. They know how to compare prices, quality of one bag versus the other, negotiate for better prices, etc. The only time men are savvy investor is when they are buying a car. Suddenly, you will notice all sorts of questions that they throw to the car dealers (i.e. horsepower, comparing against another car brand, etc.). If you think about it, all these characteristics are pretty much applicable when evaluating and buying a stock.
6. “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”
So what companies should you look at? Warren Buffett explains that he prefer companies that have durable competitive advantage. This ensures that the company could easily fend off its competitors and continue to outperform in its financial performance. Take for example Padini Corporation Berhad (“Padini”), its brand name has been well known by Malaysian for its trendiness and affordability. With these business strategies, they are able to penetrate suburban areas and widen their moat. On the other hand, Uniqlo Malaysia which is owned by Wing Tai Malaysia Berhad has not been doing so well as compared to Padini.
C) HOW TO IDENTIFY GOOD MANAGEMENT
7. “I try to buy stock in businesses that are so wonderful that an idiot can run them because sooner or later, one will.”
This is pretty much self-explanatory. While good management will bring profitability to the company, they will not run it for forever. Sooner or later succession will take place and good management may be replaced by bad management that could potentially destroy the business value. One way to avoid this is to invest in companies that its products will not change such as Dutchlady Malaysia who sells dairy milk products. It is difficult to go wrong when all the management needs to do is to keep selling its dairy milk products. No matter what happen, consumers will still buy its milk products unless it is contaminated.
8. “It’s only when the tide goes out that you learn who has been swimming naked.”
In order to see whether a company has a good management team, I prefer to look at the company’s past 5 to 10 years track record and pay special attention to how the companies performed during the crisis. By looking at this, we could identify how good the management is to ensure its company survive during the tough time. During the year 2014, oil prices crash to a low of $27 per barrel. This has affected all the offshore industry players. Some have gone bankrupt due to huge debt and poor capital allocation. This shows how aggressive some management are when the oil market is in boom time, taking on more debt without considering that oil prices may crash. Leverage is a double edge sword.
D) WHEN TO BUY
9. “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”
Warren Buffett prefers to buy wonderful companies at fair price. However, this is not advisable for those that just begin to invest in the stock market. This is because having a margin of safety could provide you a room for error due to mistakes done when valuing a company.
10. “The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.”
This is because most of the time, retail investors does not appreciate that the current condition faced by the company is temporary. Take for example, during the 2008/09 sub-prime crisis, most of the companies in Malaysia suffered a sharp fall of share price. Good companies like Time Dotcom Berhad, Genting Malaysia, Tenaga National, etc. have been down despite having a relatively strong economic moat. If you have purchase these 3 companies back then, you would have gained quite a significant percentage of returns.
E) WHEN TO SELL
11. “When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever”
When you found a good company, it does not make sense for you to sell unless it is extremely overvalued and you foresee there is a bubble. However, I would prefer to sell half of my holdings to take back my capital. This, again, helps to protect my downside risks in the event of sudden crisis happened and the share price tumbled. At least, I know that I have recovered back the capital invested.
F) PORTFOLIO MANAGEMENT
12. “Keep all your eggs in one basket, but watch that basket closely.”
When it comes to portfolio management, Warren Buffett practice focused investing. He said that:
13. “Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.”
Generally, diversification is seen as a way to reduce risks. But then your risks is reduced if you invest in companies that have great business with durable competitive advantage. Since the risk of investing in wrong companies has already reduced, it makes little sense to diversify your position into 10 to 15 stocks. With that many stocks, it actually increases your risks because the time taken to monitor it is longer. Thus, require more work than a portfolio of less than 7 stocks.
Warren Buffett also said that:
14. “It’s crazy to put money in your 20th choice rather than your first choice”
If you have found a company that is undervalued yet you only invested a small portion of your total capital while others are spread across other stocks, your gains from the undervalued company will be cancelled out against stocks that are in loss position.
In order to be successful, Warren Buffett encourage investors to:
15. “Be fearful when others are greedy and greedy only when others are fearful.”
When crisis happened, it is the time to buy stocks rather than selling. Be emotionally stable and continue to practice independent thinking in order to be successful in stock investing.
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