MrTopStep's 10 Favorite Warren Buffett Quotes:
- "Rule No. 1: never lose money; rule No. 2: don't forget rule No. 1.″
- "Honesty is a very expensive gift, Don't expect it from cheap people."
- "The most important thing to do if you find yourself in a hole is to stop digging."
- "Risk comes from not knowing what you're doing."
- "You never know who's swimming naked until the tide goes out."
- "The stock market is a no-called-strike game. You don't have to swing at everything-you can wait for your pitch."
- "I have pledged…to always run Berkshire (NYSE:BRK.A) with more than ample cash…I will not trade even a night's sleep for the chance of extra profits."
- "Be fearful when others are greedy and greedy when others are fearful."
- "It's better to hang out with people better than you. Pick out associates whose behavior is better than yours and you'll drift in that direction."
- "I always knew I was going to be rich. I don't think I ever doubted it for a minute."
Over the weekend it was revealed that a big investment firm had uncovered the secrets of Warren Buffett's trading methodology. A New York University professor and a well-known company, AQR Capital Management, one of the largest and most sophisticated money management firms in the business, teamed up to research and discover his secrets.
The study published by the National Bureau of Economic Research, claims to have uncovered Warren Buffett's secret "formula" for investing. But it contained some rather unsurprising conclusions.
They were unsurprising because Buffett and his partner, Charlie Munger, have more than just hinted at the keys to their long-term strategy of investing in undervalued quality companies. They've actually spelled them out, often in plain, clear instructions. Buffett's investment "secret formula" is not nearly as secret as Big Mac special sauce or KFC's eleven herbs and spices.
That's because it isn't a system or formula. It's about beliefs, attitudes, qualities of character. You can see that character in the plain, smart, direct, and often funny writing in his annual reports, which I and many other B-school communication profs have used as examples of great business writing.
Among the study's conclusions:
- Buffett focuses on "cheap, safe, quality stocks," meaning well-run companies whose stock price does not currently reflect their full value. He once wrote, "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."
When he makes a simple, common-sense statement like that, it's not to "dumb down" his system, but to keep his focus on the big picture and not get lost in the minutiae of analysis.
- He looks for stocks that have low volatility. Set this idea next to another oft-quoted Buffettism: "Be fearful when others are greedy and greedy when others are fearful."
Volatility is a way to quantify fear; this is why the VIX is nicknamed the "fear index." But if a stock's volatility is low, that means that the fear of owning that stock is low. Or does it?
Fear and greed are two sides of the same coin. Greed is often really the fear of not owning the stock or futures contract, the fear of missing out on the big move. And when do big moves happen? When the stock price is jumping around, i.e. when it is volatile.
Watching a stock like CostCo (NASDAQ:COST) steadily go up was like watching paint dry, but it was profitable for both Berkshire-Hathaway and the Bill and Melinda Gates Foundation. If Buffett's "formula" could be described in a word, that word would be "boring." Wonderfully, profitably, enjoyably boring.
- He enhances leverage by borrowing judiciously to buy more of the stocks he picks. That leverage is covered by the "more than ample cash" of Berkshire's other companies, particularly insurance giant GEICO.
Because they're covered and because Berkshire's worst annual loss was 9.6%, their less than 2-to-1 leverage seems entirely reasonable, especially given the 30-to-1 leverage of the banks that caused the credit crisis.
A few Buffett quotes shed light on why he regularly and safely uses leverage to achieve outsized gains. His rule #1, "never lose money," certainly means not taking intelligent risks, which goes along with his simple rule about not trading "even a night's sleep for the chance of extra profits."
Warren Buffett recognizes that leverage is risky only when you borrow to buy stocks that don't have long-term value and do it without some clear way to pay the debt if the stock doesn't go your way.
Buffett spends most of his time reading and thinking, studying a relatively small number of companies. His idea of diversification isn't the win-some-lose-some approach many managers take. By "waiting for his pitch," he keeps his powder dry for the truly great opportunities that others may not have the foresight or the cash to take advantage of.
It's worth remembering that in 2009, despite losses, Berkshire added to its holdings in a number of stocks that were at multi-year lows, showing faith in their long-term vision and in the principle of being "greedy when others are fearful."
There is an 11th quote we'd like to add, from a recent CNBC interview with Buffett and his partner Charlie Munger. His advice on how to be happy is to "find what turns you on," what is just plain fun.
He told CNBC, "We had had so much fun running Berkshire it's almost sinful." And now, he's having just as much fun giving his money away, most notably to the Gates Foundation, in what is probably the largest philanthropic donation ever.
Finally, there is the supreme confidence of the final quote, "I always knew I was going to be rich. I don't think I ever doubted it for a minute." Say that out loud once. How does it feel? To average people, this can sound like the height of arrogance, as though he's saying that he is somehow better or more deserving of being rich than the rest of us. But it's not. Instead, it's an attitude of abundance that we are all free to have if we choose. Nobody is stopping us from believing without a minute's doubt that we will be rich. Nobody but ourselves.
Imagine that every home had solar panels on the roof that would provide unlimited free electricity, only most of us kept it covered with black tarp.
Even worse, we keep it covered so long we forget it's there and we even stop believing we have limitless abundant power underneath. A few, like Buffett, remove the tarp and bask in the sunshine.
That final quote isn't Buffett saying that he's special. Like Muhammad Ali saying "I am the Greatest!" he's just setting an example for us to follow.
Perhaps in trying to find a "formula" for investing like Buffett, the authors of the AQR study would have done well to remember another Buffett quote, about there being no such formula. Or as Buffett wrote in an annual report, "Beware of geeks bearing formulas."
It may disappoint the many people who want to invest like Buffett that there is no formula, just common sense, a masterful balance of humility and self-confidence, and a mature spirituality that allows him to control lots of money without letting money ever control him.
While Buffett is quick to give credit to mentors like Benjamin Graham, his professor at Columbia and author of The Intelligent Investor, and his wise partner Charlie Munger, Buffett also makes clear that he makes his own decisions and doesn't imitate anyone.
The one Buffett quote you won't find is, "Be like me."
In other words, he invests like Warren Buffett for the only right reason, because he is Warren Buffett. Maybe the rest of us should imitate him in that one respect: instead of trying to be more like Warren Buffett, we should seek to be more like ourselves.
Now that's a great resolution for 2014.