I read an article recently about Warren Buffett when he made a particular investment that didn’t work out as well as expected1. This got me to thinking about his investing philosophy and some of the “rules of thumb” that the financial world espouses. Even when following the philosophy of a proven successful investor, care has to be taken. Thus the acronym “ABC” may have a new meaning behind it – Always Being Careful…
Below are a number of Buffett quotes on various financial topics, in no particular order2. Many are true pearls of wisdom that should become part of your investing philosophy and understanding.
Look for the focus on not following the crowd, not bowing to the pressure to sell when the market turns down, and understanding the opportunities for “better” purchases when stock values are low.
- "Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1."
- "Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble."
- "Widespread fear is your friend as an investor because it serves up bargain purchases."
- "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."
- "We simply attempt to be fearful when others are greedy, and to be greedy only when others are fearful."
- "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."
We all believe that market turbulence will happen. It's not an "if," but a "when." Be ready! Prepare yourself to not panic during downward moves, and instead to bargain-hunt for your favorite companies.
But beware of blindly holding stocks. Yes, you intend to hold them for many years, but don’t assume they will be outstanding businesses forever.
- "If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes."
- "When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever."
- "All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies."
- "Do not take yearly results too seriously. Instead, focus on four or five-year averages."
Don't buy stocks just for the sake of diversification. Nearly half of Berkshire's stock portfolio is made up of banks. Why? Buffett understands that business very well. The financial world thinks that diversification makes the world go round; the more diversified, the more enjoyable the ride. If I had a good idea that a couple of stocks were going to do what I wanted them to do, why would I need to take a chance on holding a bunch more?
- "Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing."
Ever wonder why you don’t see Buffett put any significant amount of Berkshire's capital into precious metals?:
- "I have no views as to where it (gold) will be, but the one thing I can tell you is it won't do anything between now and then except look at you. Whereas, you know, Coca-Colawill be making money, and I think Wells Fargo will be making a lot of money, and there will be a lot -- and it's a lot -- it's a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that."
- "You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what it's worth at current gold prices, you could buy -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"
So what was Warren Buffett’s bad investment?
Buffett’s Berkshire Hathaway acquired World Book in 1986. Many of you probably remember the World Book encyclopedias with its annual supplements. Many probably even used the information found within its covers for your high school research papers. It was a great tool and a great company…..for a time. Within roughly 10 years, World Book was not what it used to be.
Digital encyclopedias and online learning tools started capturing World Book’s market. In 1996, Buffett had to tell his investors that it was not the business it was only five years ago.
What have you done with your old encyclopedia set? About 10 years ago my daughter was assigned a school paper where she had to use at least two resources, which were not on the internet. She found our encyclopedias on the bookshelf and the information she needed. After gathering that information, she came to us and said, “Those books are great. People should really use those things!” Of course, I don’t think she has picked a single one up since that project.
So What Can We Learn?
Buffett’s belief in World Book may have proven a good idea for a few years. But that purchase would not hold up to a ‘buy it and forget about it’ philosophy. World Book’s world changed. New technologies began to take over its market share through ease of access, efficiencies, and costs, and it couldn’t change itself to stay in the game. This scenario is similar to Kodak’s when its business model started losing out to digital photography.
The bottom line here is that it is a good idea to purchase an exceptional company that you would want to hold on to for many years. But the caveat is that you cannot turn a blind eye to your purchase. External, as well as internal, changes can exert sufficient pressure, where the company can no longer be considered exceptional. It is okay to be of the mindset that you always want to be invested in the market, but you also have to be of the mindset that some of your market positions will need exchanging every once in a while, for your own good. Thus the new definition of ABC – Always Being Careful….
1’Warren Buffett's World Book business became his 'most difficult problem.' Here's why.
Theron Mohamed Jan. 4, 2020, 06:33 AM
2The 100 Best Warren Buffett Quotes
Here’s a long list of valuable wisdom from The Oracle of Omaha that all investors need to hear.
Matthew Frankel, CFP (TMFMathGuy) Updated: Aug 30, 2019 at 1:45PM