Saturday, August 4, 2018

Priceless quotes from the master of investing

Invest Like the Master

One of my personal favorites!

I recently read The Warren Buffett Philosophy of Investment,by Elena Chirkova (2015), to find out how the world's greatest investor plies his trade (and maybe to pick up some hints along the way!). You'd imagine that such a profitable investor would have some juicy, complicated secrets, right?

Well, according to my reading of this insightful book, Buffett’s strategy can be boiled down to a couple words: ‘extraordinary patience.’ Another couple: ‘tremendous discipline,’ which amounts to the same thing. 

Two other important words to remember include ‘integrity’ and ‘reputation.’ ‘Detailed knowledge of a company’s fundamentals’ is an additional major factor.

It is, of course, far easier to discuss these at a distance than to practice them consistently. This is certainly why successes of Buffett’s scale are so rare.

Furthermore, Chirkova notes that the structure of Berkshire Hathaway, as a Buffett-controlled conglomerate of strong companies that share access to funding but little else (and, except in rare cases, no interference in day-to-day operations), reduces short-term pressures. 

Unlike a publicly traded company, Berkshire Hathaway’s structure reduces the demand for immediate returns. Unlike a mutual fund, there is no possibility of capital shortfalls from skittish investors who withdraw their money. This structure allows Buffett to operate without compromising his long-term view.

He’s wary of debt, though he has demonstrated a willingness to use it judiciously. Leveraged buyouts are anathema. Operational synergy should not be sought, though financial and marketing synergy can be advantageous. Management should be sufficiently motivated with a carrot-and-stick model—not only rewards, not only punishments, but a combination of both.

Basically: find a good company at a reasonable price, pay for it with cash, and then don’t interfere—don’t replace management, don’t demand changes for change’s sake. Simply allow it to continue to be a good company. And always keep your word.

None of these principles are earth-shattering revelations; indeed, they’ve been known since time immemorial. But they are so rarely practiced that it almost seems like a revelation. Do you want to be like Warren Buffett? 

Then here’s your answer: fundamentals, fundamentals, fundamentals. Master the basics of business. And then, when you think you’ve mastered them, remind yourself of them every day, so you don’t abandon them for the trends of the moment.

Here are the best Buffett quotes. Page numbers indicate the page in Chirkova's book: 

We can afford to lose money—even a lot of money. We cannot afford to lose reputation—even a shred of it” (p. 287)
The business schools reward complex behavior more than simple behavior, but simple behavior is more effective” (p. 18)
When we invest in stocks, we invest in businesses” (p. 23)
It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price” (p. 33)
There aren’t that many wonderful businesses in the world” (p. 46)
The real test of a business is how much damage a competitor can do, even if he is stupid about returns” (p. 59)
Investment must be rational; if you can’t understand it, don’t do it” (p. 79)
There is a lot of difference between making money and spotting a wonderful industry” (p. 82)
...try more to profit from always remembering the obvious than from grasping the esoteric” (p. 83)
Compound interest is a little bit like rolling a snowball down a hill. You can start with a small snowball and if it rolls down a hill long enough...and the snow is mildly sticky, you’ll have a real snowball at the end” (p. 83)
Areas do not make opportunities. Brains make opportunities” (p. 85)
The most important thing in terms of your circle of competence is not how large the area of it is, but how well you’ve defined the perimeter” (p. 89)
If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes” (p. 98)
You could have bought a share of Coca-Cola in 1919 for $40 a share. A year later it was $19.50...Today that $40, if you had reinvested all dividends, is worth $1.8 million and that’s with depressions and wars. How much more fruitful it is to invest in a wonderful business” (p. 99)
It always amazes me how high-IQ people mindlessly imitate.” (p. 102)
A pin lies in wait for every bubble. And when the two eventually meet, a new wave of investors learns some very old lessons: First, many in Wall Street...will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest” (p. 103)
I will tell you how to become rich...Be fearful when others are greedy. Be greedy when others are fearful.” (p. 103)
It’s optimism that is the enemy of the rational buyer.” (p. 103)
Fear is the foe of the faddist, but the friend of the fundamentalist” (p. 103)
[Berkshire Hathaway seeks to buy companies that] we can understand, with favorable long-term prospects, operated by honest and competent people, and available at a very attractive price” (p. 104)
All intelligent investing is value investing” (p. 104)

One English statesman attributed his country’s greatness in the nineteenth century to a policy of ‘masterly inactivity.’ This is a strategy that is far easier for historians to commend than for participants to follow” (p. 105)
It is better to be approximately right than precisely wrong” (p. 107)
To many people conventionality is undistinguishable from conservatism” (p. 133)
In the short run, the market is a voting machine. In the long run, it’s a weighing machine” (p. 137)
We’re risk averse, not volatility averse” (p. 139) —This is used to make the point that “risk is a possibility of loss” [Chirkova p. 139], rather than the random ups and downs of the market.
[Risk] comes from not knowing what you are doing” (p. 139)
[I’ve] done better by avoiding dragons rather than by slaying them” (p. 140)
I would rather be certain of a good result than hopeful of a great one” (p. 141)

When companies with outstanding businesses and comfortable financial positions find their shares selling by far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as [stock] repurchases” (p. 149)
In the production of rosy scenarios, Wall Street can hold its own against Washington” (p. 151)
The smarter side to take in a bidding war is the losing side” (p. 152)

[quoting Peter Drucker] Deal-making beats working. Deal-making is exciting and fun, and working is grubby...Deal-making is romantic, sexy. That’s why you have deals that make no sense” (p. 153)
Regarding EBITDA [earnings before interest, tax, depreciation, and amortization] Why not report earnings before wages? Why not report earnings before rent? Why not report earnings before all expenses? That is called sales” (p. 171)
Some guys chase girls. I chase companies” (p. 205)
We like to do business with someone who loves his company, not just the money that a sale will bring him (though we certainly understand why he likes that as well)” (p. 209)
It’s difficult to teach a new dog old tricks” (p. 211)
We centralize money. Everything else is decentralized” (p. 215)
The best results come from letting high-grade people work unencumbered” (p. 215)

[Trying to implement a lot of changes does not work] any better in investments than it does in marriages” (p. 215)
“‘Turnarounds’ seldom turn.” (p. 253)

Bonus: “Buffett opines that between two ‘wonderful’ businesses, one should choose the least capital-intensive.” (p. 50)
Bonus: “They [Benjamin Graham and David Dodd] explain that the intrinsic value [of a stock] may be different from the ‘price,’ which, in their view, is influenced by ‘artificial manipulations’ and ‘psychological excesses.’” (p. 25)
Bonus: Buffett’s operating partner Charlie Munger, on how to invest correctly: “Ask, ‘What do you own and why do you own it?’ And if you can’t answer that, you aren’t an investor.” (p. 88)
Bonus: “Nothing important on Wall Street can be counted on to occur exactly in the same way as it happened before” (p. 118, quote from Benjamin Graham)
Bonus: “In a lousy industry, one that’s growing slowly if at all, the weak drop out and the survivors get a bigger share of the market. A company that can capture an ever-increasing share of a stagnant market is a lot better off than one that has to struggle to protect a dwindling share of an exciting market...a survivor in a lousy industry can reverse its fortunes very quickly once the competitors have disappeared” (p. 125, Peter Lynch and John Rothchild)
Bonus: “People calculate too much and think too little” (p. 139, Charlie Munger)
Bonus: “The economics are irrelevant if you don’t have trust” (p. 210, Charlie Munger)

Buffett’s annual salary amounts to $100,000 per year. He receives “other compensation” in the amount of roughly an additional $400,000 per year, for a grand total of about $500,000 per year (p. 165). Of this half-million, he returns a significant sum (around half) to repay the company for personal phone calls, postage, etc. Of course, the vast majority of Buffett’s wealth comes from his shares in Berkshire Hathaway, but it’s telling that he does not give himself a generous salary, even though few would object to such an arrangement. Buffett is clearly underpaid, in light of his considerable accomplishments—or, perhaps, the rest of the world’s executives are vastly overpaid.

This is another illustration of Buffett’s integrity. He doesn’t just ‘talk the talk’ about executive compensation, he walks the walk when it comes to his own salary as well. Buffett quotes the Bible, “For where your treasure is, there will your heart be also.”

Find out Buffett's secrets for yourself with Chirkova's well-researched book!

No comments:

Post a Comment