It’s no secret that we admire the Oracle of Omaha – Warren Buffett. We mention him often as do other finance-related blogs and newsletters. Buffett is an infinite well of knowledge and is incredibly quotable, which makes it easy for just about any investor to identify with him.
There’s a seemingly endless stream of quotes from the investor that range from picking the best dividend stocks to picking a business partner. Here are some his best:
Circle of competence
“If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter”
Inspired by his business partner, Charlie Munger, Buffett often talks about the need for sticking to what you know and understand. He says the key to his success has been understanding his circle of competence and staying within it. This is often suggested to be the reason why Buffett stayed out of technology stocks (including his friend’s company Microsoft) during the 2000’s tech bubble.
It’s not just about the margin of safety for Buffett. Buffett likes to invest in businesses that have a competitive edge that is very difficult for competitors to replicate,. It’s called a business economic moat and it’s the fundamental difference between a good company and a great company.
Hold forever (have patience)
Perseverance is remarkably important for investors. If you find the best dividend stocks, you need to be patient and have conviction in your choice. Hold for as long as you can and do not waver from your commitment to any investment till it has had enough time to show results. If you want to know when, if at all, you should sell your shares, read our article on the right time to sell dividend stocks.
“Diversification is protection against ignorance. It makes little sense if you know what you are doing.”
Of course, the Oracle believes in diversification, but only to an extent. Over-diversifying can be just as bad as not diversifying enough. If you only hold one stock, you run the risk of that one business failing. If you hold too many, your overall performance might suffer and you’ll never beat the index. Striking the right balance with the best dividend stocks is key.
“Leverage is the only way a smart guy can go broke.”
For value investors, debt is toxic. Borrowing money is actually the quickest way to the poor house. This is because it’s addictive. Positive leverage can magnify returns, of course, but leverage works both ways. If the market turns against you and you have borrowed too much money it’s likely your assets will be obliterated and you’ll lose more than you can handle. For most people the best advice is to stay clear of all sorts of debt.
Price is not value
“Price is what you pay. Value is what you get.”
This is a concept at the core of value investing philosophy. Ben Graham, Buffett’s mentor, actually started the value investing movement based on this disparity. What people were willing to pay for a stake in a business (being too excited or too pessimistic) is often different from what that stake was actually worth (in terms of its earning power over the long-term).
Good investing is boring
“Investment is most intelligent when it is most businesslike”.
Good investing isn’t about finding secy companies that produce popular apps and have trendy services. It’s not about finding a biotech company that will change the world and make you a millionaire overnight. Investment is actually more like picking groceries at the supermarket. If you have discipline and are willing to be pragmatic, you’ll see results.
Know when to be greedy/fearful
“Be fearful when others are greedy and greedy when others are fearful.”
Stock markets are volatile and you really need a stomach for investing when times get rough. Value investors like Buffett don’t just know how to handle tough times and market crashes, they wait for them. You see, when the market crashes people apnic and they tend to sell indiscriminately. High-quality stocks and the best dividend stocks get oversold, and that presents an opportunity for patient investors with cash on hand. These investors can buy cheap when others are selling. Similarly, you need to be fearful when the market is going gangbusters. If it’s overbought, people tend to overpay for stocks and it becomes difficult to find value.
Think of owning businesses not stocks
Buffett considers himself a business partner in the business he buys. Even if he owns less than 1% of a company, that small stake means part-ownership. It’s the best way to think about investing. Never put your money into a business you wouldn’t want to be associated with forever.
Never lose money
“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”
Investing for the long-term isn’t just about avoiding mistakes, it’s about applying the power of compounding. It’s important to understand that investing is all about watching your money grow over time. This implies that a dollar today is worth a lot more than a dollar tomorrow, because you can make money on money today and multiply it. To be a good investor you need to protect the downside and limit your losses as much as possible. Not losing money is way more important than making a lot of money quickly.
Don’t need to be extraordinary
What Buffett does is actually pretty simple – he values businesses and then buys them for less than they’re worth. That’s the way he built an empire. The philosophy is based on consistency. You can do one really well and all you need to do is stay the course for the long haul. Just by being consistent and doing what’s necessary everyday, you can accumulate success over time.
Mr.Market is unpredictable
Ben Graham’s ‘Mr.Market’ allegory is a elegant way to explain investing in the real world. All businesses are shared by you and ‘Mr.Market’. It’s important to understand that this business partner is crazy. He has wild mood swings and wants to buy or sell your stake or best dividend stocks for unbelievable prices. You simply have to say ‘no’ most of the time and say ‘yes’ only when the terms are in your favor.
When asked to describe the reason for their success, most business leaders often credit their ability to focus. Bill Gates agrees with this notion. It’s essential for investors to understand what they’re good at and stay focused on that forever. Deeper focus and concentration in the field you’re good at will ultimately create astonishing results.
Never underestimate the power of habit. Buffett suggests you cultivate good habits (like reading) as early as possible. Observe those people you admire most and replicate their behaviour. Over time you’ll adopt their habits and start getting similar results.
Don’t save what is left after spending; spend what is left after saving
One of the most powerful concepts of personal finance is paying yourself first. Rich and successful people often take out a portion of their income for saving and then spend the rest as they please. This is the key to creating wealth over time. Delayed consumption and wise investments in the best dividend stocks will get you to where you need to be by the time you retire.
On this blog, we spend a lot of time talking about the best dividend stocks and creating passive income. Most of our work is centered around the principles laid out by the Oracle himself. His wisdom has changed countless lives and shaped many careers.