Warren Buffet Quotes II

Buying a stock is about more than just the price. 

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." Source: Letter to shareholders, 1989 

You don't have to be a genius to invest well. 

"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." Source: Warren Buffett Speaks, via msnbc.msn 

But, master the basics.
"To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses - How to Value a Business, and How to Think About Market Prices." Source: Chairman's Letter, 1996 .. 

Don't buy a stock just because everyone hates it. 

"None of this means, however, that a business or stock is an intelligent purchase simply because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd strategy. What's required is thinking rather than polling. Unfortunately, Bertrand Russell's observation about life in general applies with unusual force in the financial world: "Most men would rather die than think. Many do." Source: Chairman's L .. 

Bad things aren't obvious when times are good. 

"After all, you only find out who is swimming naked when the tide goes out." Source: Letter to shareholders, 2001 

Always be liquid. 

"I have pledged - to you, the rating agencies and myself - to always run Berkshire with more than ample cash. We never want to count on the kindness of strangers in order to meet tomorrow's obligations. When forced to choose, I will not trade even a night's sleep for the chance of extra profits." Source: Letter to shareholders, 2008 

The best time to buy a company is when it's in trouble. 

"The best thing that happens to us is when a great company gets into temporary trouble...We want to buy them when they're on the operating table." Source: Businessweek, 1999 

Stocks have always come out of crises. 

"Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497." Source: The New York Times, October 16, 2008 

Don't be fooled by that Cinderella feeling you get from great returns. 

"The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball They know that overstaying the festivities ¾ that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future ¾ will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There's a problem, though: They are dancing in a room in which the clocks have no hands." Source: Letter to shareholders, 2000 

Think long-term. 

"Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards - so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value." Source: Chairman's Letter, 1996 

Forever is a good holding period. 

"When we own portioncs of outstanding businesses with outstanding managements, our favorite holding period is forever." Source: Letter to shareholders, 1988 

Buy businesses that can be run by idiots. 

"I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will." Source: Business Insider 

Be greedy when others are fearful. 

"Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful." Source: Letter to shareholders, 2004 

You don't have to move at every opportunity. 

"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!'" Source: The Tao of Warren Buffett via Engineeringnews.com 

Ignore politics and macroeconomics when picking stocks. 

"We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.

"But, surprise - none of these blockbuster events made the slightest dent in Ben Graham's investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist. Source: Chairman's Letter, 1994 

The more you trade, the more you underperform. 

"Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac's talents didn't extend to investing: He lost a bundle in the South Sea Bubble, explaining later, "I can calculate the movement of the stars, but not the madness of men." If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases." Source: Letters to shareholders, 2005 

Price and value are not the same 

"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." Source: Letter to shareholders, 2008 

There are no bonus points for complicated investments. 

"Our investments continue to be few in number and simple in concept: The truly big investment idea can usually be explained in a short paragraph. We like a business with enduring competitive advantages that is run by able and owner-oriented people. When these attributes exist, and when we can make purchases at sensible prices, it is hard to go wrong (a challenge we periodically manage to overcome). 

"Investors should remember that their scorecard is not computed using Olympic-diving methods: Degree-of-difficulty doesn't count. If you are right about a business whole value is largely dependent on a single key factor that is both easy to understand and enduring, the payoff is the same as if you had correctly analyzed an investment alternative characterized by many constantly shifting and complex variables." Source: Chairman's Letter, 1994 

A good businessperson makes a good investor. 

"I am a better investor because I am a businessman, and a better businessman because I am no investor." Source: Forbes.com - Thoughts On The Business Life 

Higher taxes aren't a dealbreaker. 

"SUPPOSE that an investor you admire and trust comes to you with an investment idea. "This is a good one," he says enthusiastically. "I'm in it, and I think you should be, too." Would your reply possibly be this? "Well, it all depends on what my tax rate will be on the gain you're saying we're going to make. If the taxes are too high, I would rather leave the money in my savings account, earning a quarter of 1 percent." Only in Grover Norquist's imagination does such a response exist." Source: New York Times 

Companies that don't change can be great investments. 

"Our approach is very much profiting from lack of change rather than from change. With Wrigley chewing gum, it's the lack of change that appeals to me. I don't think it is going to be hurt by the Internet. That's the kind of business I like." Source: Businessweek, 1999 

Time will tell. 

"Time is the friend of the wonderful business, the enemy of the mediocre." Source: Letters to shareholders 1989 

This is the most important thing. 

"Rule No. 1: never lose money; rule No. 2: don't forget rule No. 1" Source: The Tao of Warren Buffett 

A Prayer of Wisdom

I am not in a competition with anyone else. I run my own race. I have no desire to play the game of being better than everyone else around me, in any way, shape or form. I just aim to improve, to become a better person a better person than I was. That's me and I'm free.

GIM1130 - Economic basis of insurance: law of large numbers

The majority of insurers, however, will be unwilling or unable to go back to their policyholders for additional payment if losses turn out to be greater than expected. They must rely on a cushion of working capital (provided by the shareholders in anticipation of an investment return in a proprietary company) to meet such losses. One of the main aims of insurance regulators is to ensure that companies always have a sufficient margin of assets over estimated liabilities appropriate to the business that they conduct.
The sharing and pooling of risk is still, however, vitally important. In the real world the pattern of losses (cars stolen or houses burning down) is unstable. Suppose that, on average, one car in ten is stolen each year. If the thefts are independent of one another an insurer who had only insured ten cars would find that there was a one in four chance that two or more would be stolen, which would double the expected outlay on claims. It would not be possible to do business on that basis.
But if 100,000 cars are insured, the probability that more than 10,200 (or less than 9,800) will be stolen is only about 1%. This is an example of the operation of the ‘law of large numbers’, which may be expressed as follows:
"The observed frequency of an event more nearly approaches the underlying probability of the population as the number of trials approaches infinity."
In other words, the more cars insured, the more accurately can be predicted the percentage of cars likely to be stolen. It is this aspect of probability theory that enables the insurer to cope with variations in the pattern of actual losses. Underwriters and actuaries may also consider various measures of dispersion, that is the difference between the actual losses and average losses, when setting premiums or assessing liabilities.

LLN

Definition of 'Law Of Large Numbers'
In statistical terms, a rule that assumes that as the number of samples increases, the average of these samples is likely to reach the mean of the whole population. When relating this concept to finance, it suggests that as a company grows, its chances of sustaining a large percentage in growth diminish. This is because as a company continues to expand, it must grow more and more just to maintain a constant percentage of growth.

Investopedia explains 'Law Of Large Numbers'
As an example, assume that company X has a market capitalization of $400 billion and company Y has a market capitalization of $5 billion. In order for company X to grow by 50%, it must increase its market capitalization by $200 billion, while company Y would only have to increase its market capitalization by $2.5 billion. The law of large numbers suggests that it is much more likely that company Y will be able to expand by 50% than company X.

The law of large numbers makes logical sense. If a large company continues to grow at 30-50% every year, it would eventually become bigger than the economy itself! Obviously, this can't happen and eventually growth has to slow down. As a result, investing in companies with very high market capitalization can dampen the potential for stock appreciation.


Read more: http://www.investopedia.com/terms/l/lawoflargenumbers.asp#ixzz2ASZtbrkC

Excerpts from warren buffett's 1997 Caltech Speech

Found these excerpts on the fool.com website.

This speech is useful in resovling some question we all have as investors
- how do i accumulate a decent nest egg
- what to focus on when analysing a business (important and knowable)
- how to investigate / research a company


The first section of the speech I have quoted was Mr. Buffett's answer to the moderator's question on how individuals can grow their investment portfolio. I think this is the first time I have heard of him using the snowball analogy.

Mr. Buffett: “The first thing to realize is that it takes a long time. I started when I was eleven. Accumulating money is a little like having a snowball going downhill, it's important to have a very long hill. I've had a fifty-six year hill. It's important to work in sticky snow and you need a little snowball to start with, which I got from delivery the post actually. It's better if you're not in too much of a hurry and keep doing sound things.”

“The biggest thing I've had going for me is that we have never had big loses. I think almost everyone on Wall Street has had winners that were comparable to what we've had at Berkshire Hathaway but we have tended to avoid the losers and we have done that by trying to stick in what I call my circle of competence. I think that is the biggest thing in business, figuring out where you are good and where you are not. It doesn't make any difference how big the circle is the important thing is that you know where the perimeter is. You can have a very small circle but if you stay within that circle you'll do fine. It's like Tom Watson said, “I'm no genius but I'm smart in spots and I stay around those spots.

”“Well that is what I try to do in investments. I try to stick with companies that I can understand. You don't always have huge winners that way but you'll almost never lose any significant money. So come back and see me in 56 years and tell me how it worked.

”The second section of the speech is important because it provides us with an understanding of exactly what ideas of Mr. Graham actually caught the interest of Mr. Buffett. I also find it interesting that another great investment mind besides Mr. Graham found that technical analysis is useless. Another idea that he brings up in this section is how knowledge builds on itself. I think that is especially true for investors that already think of the investment process correctly but could present problems to those that follow technical analysis or believe in the EMT.

Mr. Buffett: “Well, the biggest thing was picking up a book when I was nineteen by Benjamin Graham called the Intelligent Investor. I had been interested in stocks since I was six or seven and I'd charted and done all this technical analysis, it was a lot of fun but it wasn't very profitable. I read the Intelligent Investor and it really had three important ideas in it: Think of a stock as part of a business, don't think of it as some little ticker symbol moving around but think of it as actually buying a piece of a business just like you'd buy a service station or a dry cleaning establishment in your hometown. Instead you're buying one-onehundredth of a percent of General Motors.”“Think of what you understand about the business and how you can value it. If it's one you can't understand then go onto the next one. His second concept of your attitude toward stock market changes is prices so that he said the stock market was there to serve you not to instruct you. So essentially he said that when a stock goes down that is good news if you know what you're doing because it just means that you can buy more of a business that you like even cheaper.

“Finally the concept of a Margin of Safety which he said if you were driving a car or a truck that weighs 9800 pounds and you see a bridge that says limit 10,000 pounds you go look for another bridge that says 20,000 pounds and you only buy securities when you think they are substantially below what you think they are worth. Those concepts all made sense to me.” “Those fundamental principles applied in various ways are the key to it [investing]. I've had an additional advantage in that I have been in both business and in investments so I have actually seen businesses.

”“Owning See's Candies, which we bought in 1972, really taught me a lot about the value of brands and what could be done with them so I understood Coca-Cola better when it came along in 1988 then if I had never been in Sees. We've got a profit of close to $10 billion dollars in Coke now a significant part of that is attributable to the fact that we bought Sees Candy for $25 million dollars in 1972.

”“The nice thing about investments is that knowledge accumulates on you and if you understand a business or industry once you are going to understand it for the next fifty years. There may be whole big areas you don't understand, like technology would be with me) but once you understand candy you understand candy.

”The following quote, in my opinion, is a little plug in favor of focus investing.

Mr. Buffett: “When I miss on a business that I can understand, that I know about, and I don't so something big, doing something small is a great sin in my view. [Those situations] have cost us billions of dollars literally”.

This next answer provides investors with a compelling way to think about investing. His advocating on focusing on the real issues and ignoring the items that don't matter in the overall equation is a great repudiation of the investing theories behind momentum market players.

Mr. Buffett: “Well, if I could do it would eliminate a lot of other problems. I wouldn't have to sit and think about whether Coca-Cola had a decent business or Gillette or something of the sort. It's just that I don't know how to do it and in business you're looking for things that are important and knowable. If they're not important than forget them and if they're not knowable forget them but if they are important they are knowable and then the question is can you find things that are important and knowable? And you can but predicting the market is one that may be important but in my view is not knowable and I don't know anyone who has made large amounts of money by predicting the market. If you can't do it then you don't want to let it interfere with something you can do.

”“Coca-Cola went public in 1919 or 1920 at $40 a share. It went to $19 within the year. It lost over 50% of its value, sugar went up in price and there were some other things. Now if you thought the market was there to instruct you might think this was a terrible business and I'd better get out of it. Or if you thought you saw the Great Depression coming or World War II, or all of these things you could sit there and think about all kinds of things. The important thing was to recognize what Coca-Cola was so if you put $40 dollars or $19 dollars at the start of that year it would be worth about $5 million now. That is what you really want, the big idea that you can understand.

”In the following answer Mr. Buffett explains how investors can use their own circle of competence in the investment process. I think you'll enjoy the investigative reporter analogy.

Mr. Buffett: “Well, it is interesting that you mention reporting because Bob Woodward I think back in 73 or 74 when I first got interested in the post we had lunch at the Madison and he was saying what he might so with his money and I said Bob why don't you assign yourself a story, get up an hour early every morning and work on a story you've assigned yourself. Now a sensible story to assign yourself would be what is the Washington Post Company worth. Now if Bradley gave you that story to work on what would you do for the next week or two? You go around and talk to people at Rand Television stations, Brokered Television Stations [?] bought them, and you would try to figure out what are the key variables in valuing a television station and you would look at the four that the Post has and apply those standards to that.”


“You would do the same thing to newspapers. You would try to figure out how the competitive battle between the Star and the Post was going to come out and how much difference the world would might be if the Post won that war then it was at the present time and what Newsweek. All of these things are a lot easier than the problems Woodward would usually be working on. Usually people wouldn't want to talk to him but on this subject they would be glad to talk to him and then I said when you get all through with that add it up, divide by the number of shares outstanding. All he had to do was assign himself the right story and I assign myself stories from time to time.”

“I may assign myself the story about how Diary Queen works and I can figure that out a lot easier than I can figure out what an Intel is worth. It is reporting. A is getting into fairly simple businesses so there aren't huge numbers of unknowables and then it is going around and talking to suppliers, its talking to competitors, maybe talking to ex-employees.” “One question I would always ask in the past, when I worked harder at this, I would go around and talk to everyone in an industry and say if you had to buy one of your competitors stocks, if you had to go away for ten years and had to buy one of your competitors stocks, which would it be and why? And if you do this enough times, it's like reporting, it starts fitting together. It's not really a complicated proposition.”

The last answer that I he gave in response to a student's question related back to what Mr. Buffett feels is important for investors to take away from the teachings of Mr. Graham.Mr. Buffett: “Graham emphasized the quantitative in buying stocks below working capital and that sort of thing. I don't regard that as the important part of his teaching. I really regard those principles of looking at the stock as a business, the margin of safety and those things so in that respect I'm pure Graham from those building blocks the quantitative parts I have changed some from but Graham wasn't as interested in business as I am actually I mean I find it fun to go in and look at a business and try to determine what makes it tick or not tick and Graham looked at it as something we could do in an office looking at a bunch of numbers and he was very successful but he really believed in the used cigar butt approach to investing.”