How to use Warren’s wise words to see you through this downturn
Over the years, legendary investor Warren Buffett has become the Shakespeare of the investment world, whose words of advice are quoted far and wide. In a recent article in The Australian, Nadine McGrath listed some popular Buffett quotes she thought might help nervy investors navigate these volatile times. Here are some of my favourites from the list.
A dozen years ago I wrote Value.able, a book about finding the best quality companies and buying them for less than they are worth. Value.able sought to explain and break down the teachings of Ben Graham, Charlie Munger and Warren Buffett. Appropriately, it was peppered with their quips, axioms and allegories.
Since the book was published, I have also been writing in The Australian, applying the principles of investing in quality businesses at rational prices in my fortnightly column in the The Australian’s weekend Wealth section.
And now, with the market well and truly in bear territory, and panic levels high, it seems the timing is perfect to bring together The Australian’s desire to educate investors with the wise words of one of the world’s most successful investors.
In an article published 17 June, Nadine McGrath collated some of her favourite Warren Buffett wisdoms to help calm the nerves during these volatile times. The service to investors this represents, at this time, should not be underestimated. And so I have refined the list but maintained the categories.
If your finger is hovering over the sell button on your Nabtrade or Commsec investing portal, and the pain seems unbearable or you fear even further paper losses, have a read of these wise words first.
And at the end of this post you will find one of my own suggestions for the list, one I believe is supremely important to mark indelibly on your mind.
1 – On market sell-offs
“Be fearful when others are greedy, and be greedy when others are fearful.”
“The most common cause of low prices is pessimism — sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.”
“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.”
2 – On predicting market downturns
“The years ahead will occasionally deliver major market declines — even panics — that will affect virtually all stocks. No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media.”
3 – On remaining calm during volatility
“Widespread fear is your friend as an investor because it serves up bargain purchases.”
4 – On bargain hunting
“In stocks, it’s the only place where when things go on sale, people get unhappy.”
“It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.”
“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
5 – On long-term investing
“The stock market is designed to transfer money from the active to the patient.”
“If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”
6 – On buying quality (something we are wedded to at Montgomery)
“Time is the friend of the wonderful business, the enemy of the mediocre.”
“If a business does well, the stock eventually follows.”
7 – On taking a contrarian approach
“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”
“Beware the investment activity that produces applause, the great moves are usually greeted by yawns.”
And finally, one addition from me. This one’s not from Buffett but a 19th-century retelling of a Persian fable by the English poet Edward FitzGerald. Also notably employed in a speech by Abraham Lincoln before he became the sixteenth President of the United States, and arguably the four most important words for investors:
“This too shall pass”
The full The Australian article can be read by subscribers here.
“This too shall pass” – 2 Corinthians 4: 17-18, and apparently inscribed on King Solomon’s ring (at that time, reputed to be the richest man in the world), who when asked as to what he wanted most, replied “an understanding mind to govern your people, able to discern between good and evil” (1 Kings 3:9).
Maybe the three most important words are “margin of safety” which becomes easier to find in such downturns. Good to read all these gems in one place :)
Whenever you find yourself on the side of the majority, it is time to pause and reflect.
― Mark Twain