It basically helps to absorb the wisdom and experience of people who have ‘been there, done that’.
When it comes to investing for wealth creation, many of us look for inspiration in the quotes of Warren Buffett. The living legend is one of the most famous and successful stock market investors in the world.
According to Forbes, Warren Buffett is the ninth-richest man on the planet with an estimated net worth of US$103.8 bn.
Since 1970, he has been the Chairman and the largest shareholder of Berkshire Hathaway.
Berkshire Hathaway is a multinational holding company and conglomerate. The company was originally a textile manufacturer, but now owns or holds controlling interests in dozens of big firms.
As the CEO of a renowned company, Warren Buffett lives by a certain set of rules and values to make decisions in life and in investing. His approach to stocks are often identified throughout his famous investing quotes.
Here are some of the most famous quotes by Warren Buffett offering insights on timeless wealth building principles.
1. Be rational
‘Rule no. 1: Never lose money. Rule no. 2: Never forget rule number 1’
One of the most popular quote by Warren Buffett and also his most important saying.
Capital preservation should be the main priority for any investor when deciding to place your money into the market.
It basically says to not to be stubborn in the market. When you go wrong and once you realise it, simply limit your losses and get out of the position as soon as possible.
Stock market fluctuate wildly on day to day basis influenced by many positive and negative factors. It’s important not to get caught up in the madness but stick to your research or homework.
2. Price and value aren’t the same: Don’t pay too much
‘Price is what you pay. Value is what you get’
In the 2008 letter to the Berkshire Hathaway’s shareholders, Warren Buffett wrote,
Long ago, Ben Graham taught me that – Price is what you pay; value is what you get. Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.
Price and value are two sides of the same coin. Understanding the difference between price and value is the core principle of value investing.
Value investing deals with two primary concepts – undervaluation and overvaluation.
Value investors consider a stock to be undervalued when it’s trading at a price less than its intrinsic value. On the other hand, when a stock is trading at a price higher than its inherent value, it’s overvalued.
Value investors are trying to find deeply discounted share prices on the market. They buy high-quality stocks and hold them for many years.
High value is usually seen in companies with excellent management and business with a good pattern of long-term growth.
3. Margin of Safety
‘The three most important words in investing are margin of safety’
Margin of Safety is a concept explained by Benjamin Graham’s seminal book, ‘The Intelligent Investor’. It has been central to the value investing philosophy.
So much so, the great investor Warren Buffett stated margin of safety might be the most important words in investing. So what exactly does the phrase mean?
In simple terms, ‘margin of safety’ is the difference between a stock price and its intrinsic worth, or value.
So if a stock is trading at ₹70 in the market, and you calculate the company’s intrinsic value as ₹100, you have a margin of safety of ₹30 (100 minus 70). In other terms, the stock is trading at a 30% discount to the company’s intrinsic value.
Warren Buffett has a very simple analogy to explain the very concept. He explains it with the concept of a bridge.
Whenever a bridge is build, the engineers will always consider various factors of safety. It should be strong enough to bear a load of a 30-tonne truck even though they know only trucks of 10 tonnes would be running on it.
This is what margin of safety is all about. It provides a cushion while investing.
This is because the process of investing involves various risks and imperfect information. A higher margin of safety will always reduce your investment risk. But the risk will always exist and managing this gap is what smart investing is all about.
4. Invest in companies you believe in
‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price’
Mr Buffett is a value investor who likes to buy quality stocks at rock-bottom prices.
He learned from his mentor Benjamin Graham that the greatest danger comes not from buying at the wrong time, but from buying stocks that ought not be bought at all.
According to him, the best stocks often suffer smaller losses when the market declines.
An average company that is available at a very low price during a bear market might offer bigger gains, but it’s also more likely to fail entirely.
The obvious way to avoid losing money is to only invest in companies that have a history of smaller losses.
One of the downside is that these companies cannot be bought at a steep discount.
However, to pick stocks well, investors must set down criteria for uncovering good businesses and stick to their discipline.
For example, seek companies that offer a durable product or service, and also have solid operating earnings and bright growth outlook for future.
5. Don’t try to predict the future, prepare for it
‘Predicting rains doesn’t count, building arks does’.
It’s one of his lesser-known quotes. It was in Berkshire Hathaway’s annual report for 2001.
That was one of Berkshire Hathaway’s worst years. Buffett admitted he had foreseen certain risks but had not acted to mitigate them. He said that he hadn’t converted ‘thought into action’ and violated his rule.
The quote tells us to stop trying to predict what would happen in the future. Rather it tell us to start building arks because the flood could come any time unannounced.
Fluctuations are the part of the market. It works on crowd mentality as all the participants in the market don’t think in the same way. The same information is viewed by people in several ways. So, the reactions are also different.
That’s why the market oscillates between highs and lows. To tackle such situations, Mr. Buffett says don’t worry about fluctuations. He suggests ‘building arcs’.
This means you should use this fluctuations in your favour to create long-term wealth. Take advantage of market fluctuation to buy stocks of companies with strong business and good fundamentals.
Warren Buffett who is also known as ‘Oracle of Omaha’ sticks to these investment principles. Try to implement these investing philosophy in your financial decisions and see the magic.
To be a successful investor, you should start thinking like a businessman and buy shares only if you believe the company has the right combination of finances, management, products, and competitive edge to succeed in the future.
Never underestimate the power of compounding. Always be in the game for long-term gains.
This article is syndicated from Equitymaster.com
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