Warren Buffett has been a great teacher to me in my career as a stock market analyst and investor. He is super generous, and is one of the greatest teachers you could ever find.
Not only are his teachings relevant to the way we invest, they also tell us a lot about how we must live our lives.
Anyways, here are five more quotes from Warren Buffett that you must read and always remember while investing in stock markets.
1. Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
‘Never lose money’ is probably the simplest and the most important rule that you must follow while investing in stock markets.
Most of us investors are always in search of that temporary rise in stock prices that will make us profits so that we can cash out. But the only rule that investors must follow, as Buffett says, is to ‘never lose money’ in stocks.
But how do you do that? How do you ‘never’ lose money in stock markets that rise and fall each day, without you having control on it?
You see, every investor loses money at some point. Even Buffett has lost a lot of money during his career as an investor. For instance, his company Berkshire Hathaway was once running a loss-making textile business, which he sold off at a big loss.
However, Buffett’s warning to never lose money is less a rule, and more a way of thinking. It’s a reminder not to stretch for the siren song of too-good-to-be-true returns.
This requires you to stay within your circle of competence, and be opportunistic in buying stocks at good prices.
2. 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.
As a young adult, I had my wisdom teeth removed. When I saw the bill, I was surprised at the cost, which was more than Rs 800 per tooth. I jokingly mentioned the bill to my dentist, and said, “Isn’t this a lot of money despite the fact that it only took you about 15 minutes per tooth?”
The dentist smiled and said, “Well, that is exactly what you are paying for. If you want me to take an hour or more to remove each tooth, I can do that. In fact, anyone can do that. But there is value in a 15-minute extraction.”
I understood his point. And I’ve never forgotten what he taught me that day. That price is what you pay, but value is what you get.
What Buffett means by his quote is that when you buy a stock, you are buying ownership of a business with real assets. The value of these assets doesn’t change just because the stock market is moody. As long as the fundamentals of the business are strong, the daily changes in stock price do not alter the value of what you own.
3. You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.
Now this is interesting. People generally have this belief that they need to be highly educated, and must have a finance degree, to become successful in stock market investing. However what they don’t realise is the one big problem with financial education.
It is that financial education leads you to one overall inaccurate belief – You start to think that you’re smarter than you are.
There have been several studies conducted in the past that have found that people who fall for investment scams are better-educated than the average person but don’t seek advice.
This is simply because the former – the better-educated people – think they’re immune to making mistakes in investing. However, the reality is that financial education appears to increase our confidence without improving our abilities, thus leading to worse financial decisions.
This is also what Buffett says. Of course, some knowledge about finance is important before investing in the stock markets, but this knowledge alone won’t be of any help to you.
What you also need is emotional intelligence, or the ability to identify, assess, and control your own emotions while investing in stock.
4. Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.
You know why most investors don’t succeed in the stock markets and have petty returns to show for their years of investing?
It is because they fail to digest or neglect the fact that they can go wrong sometimes – and thus fail to have a plan in place to deal with such situations.
I have been a stock market analyst and an investor for the past eight years. And, to say the least, I have been rather frequently – and on occasion, quite spectacularly – wrong. But that is something I always expect to be.
No one really knows what is going to happen in the future. This is especially true when it comes to the stock market. So why pretend otherwise?
When you expect to be wrong, it makes it that much easier to both plan ahead and manage risk.
As an investor, it’s important for you to develop a healthy respect for being humble with your stock selection. When you buy a stock, expect to be wrong. Realise that the odds of your stock selection turning out a loser exist.
And once a stock crosses your comfort level (on the downside), be comfortable saying, “Hey, the stock didn’t work out. I will take my loss and move on.”
Don’t try to patch up a leaky boat. Just move out before it drowns you.
5. The stock market is a no-called-strike game. You don’t have to swing at everything – you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum!’
This is one of the biggest benefits you – as a small investor – have over fund managers. You see, fund managers have to work under a certain rules and regulations while investing money.
They can’t buy certain types of stocks (like most can’t buy small-caps due to low liquidity). They can’t sell all their stocks and sit on cash when markets are in a bubble phase.
A fund manager can’t say, “Stocks are very expensive now, so I won’t buy anything.” This is because they need to continuously invest the money that they receive from new investors every day.
Also, a fund manager’s performance is measured every day and this makes him chase short-term returns.
As a small investor, you don’t work under any of these constraints. This is what gives you the ability to earn high long term returns while the fund managers are left worrying what their NAV will do tomorrow.
Is that it?
This completes our 2-part series on the key investing quotes from Warren Buffett.
But these quotes aren’t enough. Buffett’s great investing wisdom can’t be constrained in 10 quotes. He’s much-much larger than this.
If you really want to learn the way he invests, and what goes inside his mind when he is dealing with money, I would advise you to read his annual letters to shareholders, which are available for free on Berkshire Hathaway’s website.
I’ve learnt a lot from these letters for each one of them is a masterpiece in itself when it comes to lessons on investing sensibly.
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