Now that the Thanksgiving holiday is right around the corner, I thought it would be a good time to kick back and take a look at some of Warren Buffett’s most thought-provoking quotes that can improve your life, financial and otherwise. Mr. Buffett has certainly given us lots of quotes to choose from—he has been writing Berkshire Hathaway’s (BRK.A) annual shareholder letter for over forty years, and almost every letter contains dozens of pieces of financial wisdom that can immediately make you a better investor upon application. I tried to pick my favorite Warren Buffett quotes that haven’t been repeated ad nauseam and have practical applications.
Without further ado:
One. "You only have to do a very few things right in your life so long as you don’t do too many things wrong."
Since it’s the holiday season, let’s focus on the first half of that quote. If you have a couple decades left in your investment life, imagine how much your future self would thank you if you dedicated a significant portion of your disposable income to get your hands on a block of shares in consumer staple stalwarts such as Johnson & Johnson (JNJ), PepsiCo (PEP), Coca-Cola (KO), Proctor & Gamble (PG), or Colgate-Palmolive (CL). Let’s say that over the next 2-3 years you put aside $12,400 to buy 200 shares of Johnson & Johnson. That would give you $456 in annual dividends to spend as you please—but here’s the fun part—if the company can raise its dividend by 8.25% annually for the next 20 years (it has raised it by 10.7% annually for the past twenty), then you will receive over $2,000 annually in dividends from Johnson & Johnson at that point, in addition to the growing dividends that you received along the way. If you could get in the habit of setting aside enough money to buy 100-200 shares of venerable American blue-chips each year such as those mentioned above, it’s easy to see how you could set put yourself on the path to coming out ahead of 99% of the rest of the population.
Two. "Risk is a part of God’s game, alike for men and nations."
One of the things I like about focusing on income and dividend growth is that it takes away some of the power that the stock market seems to lord over some people. If I buy 100 shares of Exxon Mobil (XOM), all I have to do is monitor the $188 in annual dividends by making judgments about the strength of Exxon’s earnings power and checking the payout ratio—since Exxon only pays out about a third of its earnings in the form of dividends, it seems to be a good risk-adjusted bet to assume that Exxon will continue to pay its dividend well into the future, most likely raising it along the way. With this type of mindset, it makes little difference whether the shares trade at $50 per share or $100 per share, and it then becomes possible to tune out the daily gyrations of CNBC hosts and Fox Business Channel pundits.
Three. "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.'"
This is one of Buffett’s more risqué quotes, and it does a good job of calling to mind the difference between investors and day traders. Personally, I can’t relate to the day trader mentality—I couldn’t imagine staring at blips on a screen all day hoping they go up or down, and then getting really emotional about it. I think we should treat stock ownership for what it really is—a proportional share in the business. If you think McDonalds (MCD) is going to be selling more hamburgers, chicken nuggets, and Big Macs a decade from now (and earning much larger profits), then you should know full well what your ownership claim represents—an ownership stake in those profits, some of which will most likely be paid out to you in the form of quarterly dividends. As you buy more shares, your ownership stake increases—it’s as simple as that.
Four. "Our favorite holding period is forever."
Although no investor would be well served by holding a stock “no matter what”, I do think Buffett is on to something here that seems to fly in the face of how most people approach their holdings these days. In 1964, when shares of American Express (AXP) fell to $35 per share, Buffett started loading up, investing several hundred million dollars into the company—today, Berkshire Hathaway owns over 151 million shares of American Express. With Buffett’s biggest bets—Coca Cola (KO), Wells Fargo (WFC), Washington Post (WPC), and American Express—he loads up on shares when they are temporarily beaten down, and then holds them for the long haul, using the dividends produced to fund other investments.
Five. "I have no idea on timing. It’s easier to tell what will happen than when it will happen. I would say that what is going on in terms of trade policy is going to have very important consequences."
I like this quote a lot, and I think it’s particularly relevant in light of the recent dissolution of the Deficit Commission. Can you honestly imagine Warren Buffett sitting in Omaha waiting to hear about the deficit commission before making a decision? Of course, that would be ridiculous. We should get in the habit of identifying companies that we like with strong long-term prospects, and then buy when something irrationally depresses the prices. If you were planning on buy shares of Proctor & Gamble for $62, and the failure of the deficit commission pushes shares down to $61 amidst a broader market sell-off, then you should use the opportunity to load up on shares that are selling at a slightly better discount.
A lot of people lament falling stock prices. If you’re planning on selling shares in the near future, then that’s a perfectly understandable lamentation. But if you plan on being a net-purchaser of stocks in the foreseeable future, then falling stock prices should be your best friend since they enable you to buy an ownership claim of more future profits at a lower price. As long as the earnings aren’t impaired in any way, you should rejoice at falling prices—if Berkshire’s Class B shares (BRK.B) are going to earn $5 per share, why wouldn’t you rather pay $70 for each ownership claim instead of $85? If you adopt an ownership mentality and seek to buy the greatest amount of risk-adjusted future profits at the lowest price possible, then you’ll do fine. I hope you enjoyed these Warren Buffett quotes, and I hope you all have a great Thanksgiving Holiday and weekend.
