When it comes to finance and investing, maverick investor Warren Buffett is one of the most respected names there is. Every year, over 40,000 shareholders flock to the annual general meeting (AGM) of his Berkshire Hathaway at the CenturyLink Center in Omaha, Nebraska, USA.
While many of you may not be able to attend this session to listen to what the Oracle of Omaha, as he is commonly referred to, has to say, his words of wisdom over the years can still impact our investment decisions.
He has said many things about investing during media interviews, in Berkshire Hathaway’s yearly shareholder reports and while replying questions during his AGMs. We look at four popular quotes from him which may provide some enlightenment to the way you manage your investment portfolio.
1. "Never invest in a business you cannot understand."
This quote sets us up nicely – explaining that investors need to understand what they are putting their money into.
Warren Buffett is perhaps the most famous value investor. This means he understands the businesses he wants to put his money into very well and reads into them in great details. This includes analysing their financials, knowing their management team as well as understanding each of their unique advantages they hold in their respective industries.
Likewise, when you start to invest, never put your money into a business you do not understand. In fact, you should never invest in any investment that you do not actually understand – be it stocks, unit trusts, bonds, derivatives or even agar wood and overseas landbanks.
Take time to learn a little more about where your money is going. This will ensure that you always know the merits of why you got invested and will not get coerced into putting money in investments riskier than what you are comfortable with, or worse, "investments" which are outright scams.
2. "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."
This thought-provoking quote explains the need to choose every investment wisely. By only investing in companies that you cannot sell within a decade, you will train yourself to assess their strengths and weaknesses in the long-term and question their unique advantages in the industry that will allow them to successfully run their businesses for a long time.
Warren Buffett has said that his preferred investment horizon is "forever". While he usually goes into his investments with this mindset, he has obviously sold off some of his investments over the years. The reason he does this usually goes back to the first quote – he understands the businesses and believes that their prospects have changed.
If you are willing to put your money into a company after understanding its business and taking into consideration how it will likely perform years down the road, short-term price fluctuations will matter less to you. Instead, you will be honed with the ability to critically evaluate your investments rather than to react emotionally. At the same time, you will be well-equipped to identify red flags that may change your investment decisions.
3. "Be fearful when others are greedy and be greedy when others are fearful."
While this may sound like advice to sell when markets are doing well and buy when markets are doing badly, it really just boils down to knowing what you are doing.
Investors should refrain from allowing a herd mentality to blindly lead them to invest in fads or trends when certain stocks or the entire market is moving up. Similarly, when the market is depressed, investors who know what they are doing will naturally see attractive opportunities.
In 2008, when the world's biggest financial institutions were in turmoil during the global financial crisis, Berkshire Hathaway poured US$5 billion in investments into Goldman Sachs, a leading investment bank that had a unique advantage in its field. Within five years, Warren Buffett earned a return of close to 62%, or US$3.1 billion1.
On the flipside, Warren Buffett sold his entire 9% stake, worth close to US$4 billion, in mortgage loan company, Freddie Mac, in 2000. This was when financial institutions were having it good. He cited increasing riskiness of the company’s business as one of the main reasons for this. Interestingly, this was just eight years before the global financial crisis which brought the company to its knees, requiring a government bailout.
If he had not sold it off when he did, Warren Buffett's 9% stake would have been worth US$230 million today, or about 5.7% of what it used to be worth. This is an example of the man turning "fearful" when everyone else was becoming greedy in the market.
4. "Can you really explain to a fish what it’s like to walk on land? One day on land is worth a thousand years of talking about it, and one day running a business has exactly the same kind of value."
In this quote, Warren Buffett is talking about experience. Whether it is the experience of "walking on land", running a business or actually starting to invest, there’s no substitute for actually getting down to doing it.
You can read all the books, attend all the seminars and know all the jargon but still not understand how to invest because you have never really done it.
People might procrastinate or wait for the perfect time to invest, but we included this quote here mainly to highlight the risk of ploughing your life savings into investments at one go. This is the wrong way to start investing.
The trick is really to get your feet wet, preferably when you are younger, by investing smaller amounts at regular intervals to gradually build your portfolio and understanding. If you require more guidance or are unable to monitor your portfolio, you can start by letting a financial adviser representative manage your unit trust investments.
This way, you can learn more about investing and still retain the flexibility to choose your funds or take over all or part of your portfolio if you are more confident further down the road.
Singlife's Navigator and dollarDEX platforms both offer regular savings plans where you can start with a minimum initial investment of S$1,000 and subsequent regular investments of as low as S$100 for unit trusts.
Building a long-term portfolio
These are just four of Warren Buffett's many quotes. To build a long-term portfolio, you need to continue your research and learning, and it is also important to start early.
With these four quotes in mind, you may set out to create a solid foundation to a portfolio that could deliver returns over the long term. While doing so, you'll build your knowledge along the way.
As a recap, you should always invest in what you understand. If you do not have sufficient knowledge to monitor what you are putting your money into, you may be better off not doing anything.
Warren Buffett is also perfectly happy to "sit here all day" until a good investment comes along. Similarly, you should not be in a rush to invest until you find an investment you are willing to hold for the next 10 years or more.
Rushing into investments usually means following a herd. This often spells trouble as people who do this typically do not understand the investments and are just chasing a hot market or following a popular trend, both of which may not last.
Lastly, while reading and gaining knowledge is important. You ultimately need to get started to really understand yourself as an investor and continuously build up confidence and knowledge in tandem with your portfolio for the long term.
1. Source: Quartz Media, "Here's how Warren Buffett made $3.1 billion on his crisis-era bet on Goldman Sachs", published on 26 March 2013.