Welcome to session 23 of the Investing for Beginners podcast. I am Dave Ahern and I am joined by my co-host Andrew Sather. In today’s session we are going to discuss some quotes from the great Warren Buffett.
Buffett is arguably the greatest investor of our generation, possibly ever and he has been a fountain of wisdom and advice for years. Needless to say, he has created some great quotes through the years either from his shareholder letters or other writings. Additionally, he is a prolific speaker and has many memorable quotes from his fantastic speeches as well.
- Rule number one doesn’t lose money, Rule number two, don’t forget rule number one.
- Look for wonderful businesses at fair prices
- Reading is one of the keys to unlocking your greatness as an investor
- Value investing is a investing style that average people can easily adopt with great results
Dave: Warren Buffett is quite the quote master, and he has come up with some very witty quotes through the years. Andrew and I are going to take turns talking about some of the favorites and give you our two cents worth on what we think of these quotes and their meanings.
I am going to go first with my favorite quote from Warren.
“Rule number one, never lose money. Rule number two, don’t forget rule number one.”
That is so apropos when we are talking about investing, Andrew made a great point in his email letter that he sends out every day. He was talking about losses, and how you need to avoid them, this is something that Warren Buffett has done an amazing, masterful job at doing, not losing money.
Because when you lost money to make it back, it is very difficult to recover the money. Andrew was coming at it as a point of looking at growth stocks, and how they can be kind of risky.
Andrew and I have talked a lot about this about the margin of safety and looking for the safety part of it, that is our emphasis. And not being aggressive and going after risky stocks, this quote from Warren Buffett sums that up.
Don’t forget rule number one, don’t lose money. It doesn’t mean that the stock won’t go down from time to time, it will, but as a long-term investor, you are more focused on the long-term horizon of a stock when you are buying it.
What Warren Buffett is talking about is talking about a long-term horizon for any stock, regardless of religious denomination. He is looking at the long-term and is more worried about that as opposed to the short term volatility.
I have a personal experience with this. When I first got into investing, I bought a stock that I had read a little bit about, again I didn’t know much about the company and didn’t know what I was trying to do and didn’t have my rules in place yet.
I bought the stock and was super excited about it, and it went up from $9 to $13, and I thought this investing thing is easy! And then about two weeks later it went back down to $9 and then a couple of weeks later it was down to $7, then $5 and $3.
And now it is around $1.22; I lost my shirt on that investment. For me to get back to even at the $9 is going to have to grow around 722%, and that is just about impossible.
This is where the numbers can hurt you when you are looking at this, and that is why investing with a margin of safety is so critical to investing. Just not taking chances with something like that.
Andrew: Yeah, that whole mathematical reality is something that is not instinctual for anybody, but it’s something that when you understand that “wow, losing money from an investment standpoint does that forcing you to realize that worst you can do is lose all of your money.”
When you start to lose more than 50%, you are going to have to double, triple, quadruple your money just to break even.
It is something that I try to point out in my email today and just like all good rules there is a lot of common rules that have this format.
Rule number one, don’t forget rule number two. It is so critical and so indicative in how Warren Buffett kind of proved his own words. Lived what he teaches because during the dot.com bubble he had a period where all these news articles were coming out about him saying that he had lost his flair.
He was underperforming and was this old washed up guy who doesn’t understand that technology stocks are where you need to be. He was not being the Warren Buffett that people are used to seeing with him in that sense that he didn’t have the spectacular gains.
You had young guys coming up and making all this money in a really short amount of time, buying expensive, risky stocks.
But what Buffett was doing was understanding that rule number one I am not going to lose money. So I am not going to buy these risky stocks, and I am going to be patient and understand that even if these stocks go up high, I am not losing out because there is no margin of safety there.
Once the stocks crashed and they weren’t able to sustain their high prices and valuations, as tends to be the case. He did not lose money as all the rest of the other guys did.
Who are we talking about today? Are we talking about the guys who made their fortunes in ’99 and the 2000s, no we are not? We are talking about Warren Buffett because he understood this rule and practiced this rule with his investing.
Dave: Exactly, we have mentioned this many times before, and I’ll just make a quick quote about that. Typically the stocks that are boring are the ones that sell the best. People are not wowed with the fancy labels.
Andrew: I don’t remember which investor said this, but they said that investing is supposed to be like watching paint dry and if it’s not you’re doing something wrong.
Next Warren Buffett quote, I like this one.
Investors should remember that excitement and expenses are their enemies, and if they insist on timing their markets, I will rely on their know-how to fix or repair many items. They should be fearful when others are being greedy and stingy when others are greedy.
Building wealth and getting rich by getting in the stocks that are exciting. You are not going to be doing well by paying for a fund manager who gets into exciting stocks; there’s the expenses part.
And you need to be fearful when others are greedy and greedy when others are fearful. Be a contrarian and going against the grain and doing what’s not popular and exciting.
It’s really at the core of what value investing is because if you’re going to buy stocks that are discounted. You’re going to have to do it against the grain and be fearful when others are greedy.
Maybe stay out of the expensive stocks when everybody else is jumping in them. On the flip side, you have to have the fortitude to understand when the world is burning around you and people are losing their jobs, money is getting tight. That is when you need to be diving in.
He prefaced the quote by saying if they insist on trying to time their participation in equities.
Trying to time the market is tricky, not something Benjamin Graham teaches. I don’t even think Warren Buffett necessarily says you need to time the market. But if you do make sure you are going against the grain.
I think it is a good idea to just do that in general, because if you are dollar-cost averaging as I teach and what Dave teaches you are going to be putting money in the market consistently. But there are still ways to be fearful when others are greedy by buying those stocks and focusing on the margin of safety.
There are ways to be greedy when others are fearful by buying with a margin of safety when pessimism is low there. It goes again to a margin of safety because when there is pessimism that is when the stock will be beaten up in the market.
The picture that the market is painting of the stocks isn’t completely reflective of the reality of the business. And that is where your opportunity is going to be.
Dave: Exactly, that is a very good point. Andrew and I talk a lot about this; sometimes I often wonder if a great way to find the opposite of companies to investigate is to watch CNBC and listen to the companies that are being beaten up or they are negative about.
Sometimes those are going to be the best opportunities to get into because for whatever reason the stocks have fallen out of favor. When you do your research you discover that the financials are great, management is tenured and they know what they are doing.
It just may be in a situation where some negative news came out that doesn’t affect their value of the company, this will give you the opportunity buy into the company at a discount to the price, and I know that is one of the things that Buffett often does.
He looks for opportunities in different sectors that may be beaten up for whatever reason or that are out of favor. Possibly they aren’t followed as much by analysts, Andrew and me have mentioned that several times.
One of the strategies that Andrew and I adhere to is finding companies that aren’t followed as much by Wall Street because that is going to give you more opportunities to find companies that are a little bit off the radar.
The other thing that Buffett does is he sits on a lot of cash, now you and I are not going to be able to sit on $180 billion, that obviously is not in our reach.
But having a nest egg set aside for the next eventual market crash is not a bad idea because when stocks do crash, that will be an opportunity to buy into some great companies.
Andrew made a great point talking about all the millionaires that were popping up during the dot.com era. Like Andrew said we are not talking about any of those people now, we are only talking about Warren Buffett, Charlie Munger, Joel Greenblatt, Peter Lynch, anyone who followed the time-tested value investing and waited through that period.
They didn’t get caught up in the enthusiasm of everything that was taking place at that time. Those are the reasons the why those people are successful is just sticking to their values and doing what works for them over the long-term.
Next quote I would like to talk about is.
To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may be in fact be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools whose finance curriculum tends to be dominated by such subjects. In our view, though students need only two well-taught courses. How to value a business and How to Think About Market Prices. This is something that Andrew and I have been beating the drum about since we started this podcast.
The education world and you look at the investing world there are different camps. And one of the bigger camps out there right now is the Modern Portfolio Theory, which Andrew and I have talked about extensively, the efficient market as well. We haven’t touched much on beta, option pricing, and emerging markets.
They all fall into the same category, and you don’t need to know those things, they are not critical to your becoming a successful investor. He is right on the money about valuing a business and figuring out what the intrinsic value is so you can buy with a margin of safety, emphasis on the safety.
Thinking about market prices, the price of what you think it is worth, versus what the market is valuing it at that particular time.
If you know these two simple things, you can do some serious damage in the stock market. I think that he is right on the money, he and Charlie Munger talk a lot about this the way that they invest is not difficult.
I am not saying that it is easy, it is not. But what I am saying is that you don’t have to be educated, a degree in math or finance. These are principles that you as an everyday person can figure out on their own.
Andrew and I have all kinds of great resources that we read about, talk about on our podcast and have links to give you successful ways to value a business and think about that relationship to the market price.
If you do those two simple things, you could be very successful in the market. I know that Andrew has been and I know that I have been as well. Just by following these two simple rules.
Andrew: That is what drew me to value investing in particular. I have always seen myself as a very logical guy, but I always need to understand what the big picture is, and if there is a lot of complicated jargon or I have to start doing differential equations, it is not something that I am going to want to pursue.
To me investing is simple and that is why I structure my website the way that I do. I break it down into seven easy steps, and I try to talk in layman’s terms. I try to do the podcast in the same way.
It s because when it comes down to it, the companies primary focus is to make a profit. It is supposed to pay off some of those profits to the owners.
You can use debt, but you need to understand where it is coming from, how it is financed, and what is in it for the restaurant.
Companies use debt all the time, but they need to make sure that they don’t swing over into the other realm where you use debt to help finance your next adventure. It just needs to make sure it has enough cash on hand to deal with any emergencies.
Right there are the three financial statements, and you can get deep down the rabbit hole. This is something that I did when I first started diving into these ideas. That, in the end, isn’t going to make too much of a difference.
I enjoy learning more about it, reading, researching about it. But the fact that I was able to get a grasp on it pretty quickly drew me to want to teach it for beginners. Because I thought this is something that should be taught, and just read a couple of good books that laid it out.
I’ve gone down the path of efficient markets and modern portfolio theory and beta, there are different types of resources, some of them can be crippling, and some can be empowering.
That is one of the reasons I strongly advocate for anyone to read the Intelligent Investor because it’s one of those that empowers you, gives you a new paradigm and helps you understand this is how investing works.
It’s not a game with stickers and flashing signals. It is a business, and these are the numbers behind the business. When you think about markets, you want to think that the market is going to be efficient, but then you see things like the Twins VIP room and think that nothing is efficient about this.
You could be shooting yourself in the foot and fulfilling your self-fulfilling prophecy; I am sure you have areas in your life where you are superior to the average. You understand that nobody can be the most of everything. But you understand that everyone has their strengths, and I am sure in other areas of life are struggling, Just failing believes will be lead to enterprise shield covered the both of us today/tonight.
Focus on what is going to make you money, how to value business. This is a metric that we have talked quite a bit about on podcasts, blogs, and financial resources.
Understanding that gives you the confidence to move forward. Being able to find the intrinsic value of a company helps you understand that this stock is expensive and this one is cheap, sounds simple and it can be so confusing. But when you break it down into simple terms that become so powerful.
How to think about market prices, I think he is just saying understanding how the market works, understand the nature of the beast. It is so complicated that no one can understand everything about it, but if you try to understand its behaviors and see there are some commonalities from year to year.
You can do well enough to manage it; we did a review of Chapter 8 of the Intelligent Investor recently. That one was a chapter that Benjamin Graham wrote that was a huge influence on Warren Buffett; it broke down how the market worked and gave you that decoder that showed you this is what it is going to do so be careful.
It is important to get that perspective so when it does act irrationally, or it does try to sweep you off your feet, that it doesn’t blindside you, and you understand it.
So the next one that I like, and I feel like it is a curveball.
It says “Wall Street is the only place that people arrive to in a Rolls Royce to get advice from those that ride in on the subway.”
So if anybody knows Warren Buffett, they’ll know that he is pretty frugal. Especially for someone who is one of the richest men in the world. He has bought a small quaint house in Omaha where he still lives today.
Understand that a big part of winning with money is not only learning how to make more money with money. You have to have the money to start with.
You can go online, and you can look up a compound interest calculator, and you can start pounding numbers. As you increase that return percentage average if this is how much I will make each with 10% returns, 11%,12% a year you can start to grasp that there is a huge difference between $100 and $1000 a year or month.
That adage that you have to have money to make money is true. Don’t think that you can just put like $2 a month into the market and become wealthy if you just pick the right stocks. That just not going to happen and that’s lottery ticket thinking.
You do have to get your finances in order and especially the people listening to this show. IF you’re anything like us, you’re an average investor, and you’re trying to get a grasp of the market yourself.
So you can move towards your own financial goals, finding your financial freedom and everything that goes along with that. Don’t just piss your money away in a Rolls Royce only to realize you could have made that money so much more.
It goes to the conservative type of mindset. The type of person that drives a Rolls Royce wouldn’t be the best in the market because he is the same guy that is going to buy Tesla because he thinks it’s exciting and he likes Elon Musk.
Those are two really important points that we need to understand as we move along our investing journey.
Dave: I agree with that, you know a lot of people don’t know that by Warren Buffett still lives in Omaha, Nebraska. Which is far removed from the financial world and it’s also as somebody that grew up in Iowa, I understand Nebraska. It is far from exciting; it’s about as far removed as you can get from that.
I think that says a lot about him as a person; he is not worried about the trappings of wealth. That is not what drives him, what drives him is that he likes what he is doing and he likes the challenge of what he’s doing.
Another thing I like about that quote is that it shows the everyday person, the guy taking the subway is the one with the knowledge. It’s not the one with the Rolls Royce, its the one that’s just an average everyday person that has the knowledge and they can use that knowledge to help them become wealthier over time.
The thing that Andrew and I both talk about and both agree on this; this is not a short-term, get rich quick in two weeks investing style, if that is what you’re looking for, then you are in the wrong place.
We’re about building your wealth over time and using the principles that we talk about to help grow that wealth over time, as Andrew talked about the compounding interest earlier. That is one of our very big friends, along with dividends. This is the way that you can do it.
All the big investors that we have talked about have done it this value investing way, and average everyday people can do this as well. You don’t have to be a billionaire to get to make money.
But like Andrew was saying, you do have to have your financial ducks in a row; you do have to have the diligence and the discipline to be an investor, and also to be a saver.
You do have to save some money to be able to do this, that is one of the things that Andrew and I both do. I know that I do it where every couple of weeks I have when I pay my bills from my paycheck. The first person I pay is Dave, and the next is probably my landlord, bank, and so on.
I am the first person that I pay every week when I receive my payroll, that is to me is important. This is what I have done to make sure I can set aside enough money for myself because this is important to me.
I of course, like all the frills and nice things that everybody else does. I guess for me I have made that choice that I want to have a better retirement and to help my daughter with her schooling. To me, that is more important than buying some extra.
The last quote that I would like to read is:
It is far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.
Where he was going with that was finding an awesome company at a fair price is going to give you a long term value for the company. Andrew talks a lot about the dividend fortresses, and those to me are wonderful companies. They are companies that have been around for a long time, and they know their stuff.
And finding a good price on a Johnson & Johnson is going to be so much more valuable than finding some sporty, yellow car.
The market is always a twitter about something; the obvious issue is the possible transfer of a host to server and vice versa.
There is always going to be stocks that the market is always excited about, like Snapchat, Facebook, etc. When you get excited about a company, does it have long-term value? It’s hard to say, a lot of people were skeptical about Facebook, and maybe they still are.
People were skeptical of Microsoft, and they’ve certainly stood the test of time, although they may be a little overpriced at the moment. There are so many great companies out there and finding a good solid company that is going to be around for the next 30 to 50 years and is going to pay you a dividend. Is going to be so much better investment, than finding something that is super exciting, flashy, and super sexy.
Those companies may be the flash in the pans or don’t work out for a variety of reasons. These are the types of investments that you can lose money on, and then you will have to do better to recoup your money on the next investment.
That is one of the things that Andrew and I talk about a lot, and Warren Buffett does as well. When he first goes into investing, he was of course following the Benjamin Graham model and one of the things that Graham was known for was the term “cigar butts.” And that was buying these super cheap companies that were just beaten down.
And he would find these companies that he thought had some value to them, buy them dirt cheap and then the market would discover them.The price would go up and he would make a lot of money.
Over time Buffett has moved away from that, now he is more interested in finding a wonderful company, like a Coke or American Express, recently Apple. Some of these great companies taht he feels are going to stand the test of time.
Then he works out to find what he thinks is a fair price for that value of that company and then when he will buy a company.
Andrew: Yeah, I completely agree. In my opinion, when he says the wonderful company, I just think of a company that has a really strong balance sheet health. Which goes to the safety part of the margin of safety.
If you buy businesses that are just built like fortresses in the sense that nothing can penetrate them. They have these assets; you want these assets to produce income. That is what makes an asset valuable
When you have so many assets and not that many liabilities, or you have a big cash position. One of my dividend fortresses just has an insane amount of cash. In my mind, that is what makes wonderful companies, and I am willing to pay a bit of a steeper price to get into that kind of things.
It’s one of the reasons I like to talk about valuation as a broad metric, instead of a singular metric. It doesn’t have to have the lowest price to earnings, price to book, or super beaten up. I would prefer to have a company that I hope can continue to grow and pump out dividends so that I can get that double compounding interest that I like to get from dividend growth stocks.
Again, it’s why my eLetter has a huge focus on dividend fortresses, and those are the long-term goal. Value investing is one-way o select those stocks, but in the long-term, I think Buffett shows this is in actions. You can see the dividends start to grow.
It’s those dividends that grow and get reinvested over time and can add up fast. When you have that long-term mindset and the fortitude to hold over the long-term.The company that you own has the fortitude to weather these storms of bad economies or fierce competition. That is what is going to make a dent in his thinking.
That would be a large part of your earnings. Over time this is going to create some serious plays over his lifetime. I would hazard that is nothing that I haven’t done myself; she has probably seen it or done it.
You need to understand the principles behind what Buffett is trying to teach and apply them and let the business do what it does.
I think I am going to close here with a quote that I like.
If somebody looks up to Warren Buffett or maybe even us, and other investors that they acknowledge knows where everything is. They see that he is very knowledgeable and wants to be a step towards that direction tomorrow.
Hopefully, steps that lead her towards the future did it for a reason. I think that Buffett would say it, he is known for this quote as well.
Do a lot of reading!
Reading and books is one of the best ways to learn, especially investing. There is so much to learn and one of the best ways, if you are involved with Amazon at this point, we would need to have you sign up and get registered.
I think Buffett would say and I definitely would say what you should do is as he is quoted as saying.
“Do a lot of reading.”
Reading and books are one of the best ways to learn; there is a quote that says when you read a book, you are letting that persons, thoughts, morals and good judgment become involved in hiring or firing people.