1. “The chains of habit are too light to be felt until they are too heavy to be broken.”
Most people look at this quote and treat it as a cautionary tale about vices and the slippery slope of bad habits. But I’ll try to take a more positive spin on this, and apply it to DRIP investing. Let’s say you set up an account with Computershare to buy $100 of Exxon-Mobil (XOM) stock each month. Getting started is the hard part—it’s easy to put off investing until next week, next month, or whatever. But once you get in the habit of automatically investing each month, it becomes part of your budget, and it will become an ingrained habit.
2. “I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.”
There seems to be a perverse human tendency to make simple things easy. Why buy a well-branded beverage company like Coca-Cola (KO) that brings in regular, steady profits every year when you can buy a foreign derivative from an African tech stock that also sells airplanes in Morocco? Instead of getting caught up looking for the next big thing, look to the blue-chip stocks with growing earnings and dividends that are selling in the 10-13x earnings range.
3. “If a business does well, the stock eventually follows.”
This quote seems to come right out of the Benjamin Graham playbook. Graham famously said of the stock market, “In the short run, the stock market is a voting machine. In the long-run, it is a weighing machine.” We should remember that stocks represent a real ownership stake in companies, not mere blips on the screen. Eventually, the stock will correspond to the earnings growth. Dust off the annual report and see if the stocks you own are doing well and growing as a business and enhancing their competitive positions—if you already own the stock and the business is growing satisfactorily, you might have to wait awhile, but eventually, you’ll get your price.
4. “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
Most people don’t take this quote literally, but in fact, there have been extended periods in American history when the stock market closed for extended periods of time. The most famous example is when the market closed from July 1914-November 1914 during World War I. Of course, these companies managed to pay out dividends during this time frame, but no buying and selling took place. While I don’t anticipate stock market closings anytime in our future, it’s best to get in the habit of only putting aside money in the stock market that you won’t need to touch for at least five years.
5. “If past history was all there was to the game, the richest people would be librarians.”
General Motors. Eastman Kodak. Sears-Roebuck. All of these companies were once considered blue-chips in the eyes of the American investor. In hindsight, it’s easy to see how companies rise and fall. It’s a lot harder to monitor a company’s competitive position as you’re living it. My best gauge of interpreting the health of a so-called blue-chip stock is by confirming that: on a three-to-five year basis, the earnings are growing. Over the same time frame, the dividend is growing. And I like to see that the payout ratio for dividends is less than 70% of earnings. If a company fails these tests, I’ll put my money elsewhere.
6. “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”
This quote, more so than any, seems particularly applicable in today’s investing climate. The same people who were loving stocks when they rose 5% during one week in July are now fearful of them after a 10%-15% correction. If the general outlook or your perception of a company’s earnings don’t change, then you shouldn’t dislike stocks more now than you did in July. If your perception of what PepsiCo (PEP) is going to look like in 2020 hasn’t changed in the last month, then why wouldn’t you be thrilled that you can buy in at around $63 now, compared to $70 in July? As an investor, your job is to buy the greatest amount of future earnings at the lowest price, risk-adjusted.
7. “The investor of today does not profit from yesterday's growth.”
Yes, Apple (AAPL) stock had a phenomenal decade. The stock price climbed over 6,000%. They introduced iTunes in 2003, the MacBook in 2006, the iPhone in 2007, and the iPad in 2010. That fueled a heck of a decade of growth. Apple could be a great ‘buy’ at today’s prices, but remember, it was the long-term shareholders who benefited from the stock’s great 2000-2010 run. Once you buy a company’s stock, you are betting on the success of the company to continue moving forward. Don’t let a company’s past glories cloud your judgment of its future.
8. “We believe that according the name 'investors' to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a 'romantic.'”
Buffett, more so than any other well-known investor, has established a reputation for long-term investing. He even noted once that his favorite holding period is “forever.” If you trade by buying and selling stocks every month, then you’re a speculator, not an investor. You’re just hoping to capitalize on the irrationality of someone else. Meanwhile, an investor has an ownership claim proportional to the number of shares he purchases. If you buy 100 shares of Wal-Mart Stores (WMT), then you have a claim to 100/3,500,000,000th of the company’s overall profit. Every time someone walks in the store and buys cereal, soda, beer, soap, or whatever, you own a small portion of the overall profits. And if the company grows over time, then so will the value of your ownership stake.
9. “We're still in a recession. We're not gonna be out of it for a while, but we will get out.”
If you wait for everything in America to get rosy, then you’ll miss out on the gains. It's as simple as that. Historically speaking, the prices of stocks run ahead of the overall economy by about six months. We all know that we should ‘buy low and sell high’, but when it comes to actually executing that strategy, we sometimes fall short. If you can have the discipline to put your own surplus funds into the stock market when all the financial pundits are predicting doom, you will put yourself in a superior position to reap the rewards when the good times return.
10. “Risk comes from not knowing what you're doing.”
A goofy notion that always seems to emerge during a recession is that lower (that is, falling) prices imply increased risk. That’s simply not true if you have the perspective of a business owner when you buy stock. Lower prices give you higher earnings yield, and therefore, entitle you to a greater claim on profits. Microsoft (MSFT) is ‘less risky’ to own at $25 per share than it is at $35 because your shares represent a greater claim to the company’s profits. The real risk is if you buy stocks outside your circle of competency, and have no idea how to judge the company’s future prospects.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.