While Warren Buffett is always looking to buy stocks and whole businesses that are undervalued, he always keeps in mind that you need to maintain enough reserves to have adequate liquidity.
“We know we don’t want to go broke,” Warren Buffett said at the 2012 Berkshire Hathaway Annual Meeting. “I mean, we start with that. And we know you can’t go broke if you’ve got a fair amount of liquid reserves around and you don’t have any near-term debts and so on.”
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.
Warren Buffett is fond of reminding investors about “Mr. Market,” Benjamin Graham’s personification of stock market fluctuations that he describes in Chapter 8 of The Intelligent Investor. Graham notes that sometimes the prices for stocks that Mr. Market quotes are reasonable, but sometimes “Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.”
This brings us to a key point that Warren Buffett is keen to emphasize. The market is there to serve you not instruct you.
“The beauty of stocks is they do sell at silly prices from time to time,” Warren Buffett said at the 2012 Berkshire Hathaway Annual Meeting. “Ben Graham writes about it in Chapter 8 of The Intelligent Investor. . . Chapter 8 says that in the market you’re going to have a partner named ‘Mr. Market,’ and the beauty of him as your partner is that he’s kind of a psychotic drunk, and he will do very weird things over time and your job is to remember that he’s there to serve you and not to advise you. And if you can keep that mental state, then all those thousands of prices that Mr. Market is offering you every day on every major business in the world, practically, that he is making lots of mistakes, and he makes them for all kinds of weird reasons. And all you have to do is occasionally oblige him when he offers to either buy or sell from you at the same price on any given day, any given security.”
As Graham wrote:
“If you are a prudent investor or a sensible businessman, will you let Mr. Market’s daily communication determine your view of the value of a $1,000 interest in the enterprise? Only in case you agree with him, or in case you want to trade with him. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position. “
Buffett’s full explanation on the stock market and stock prices
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.
It probably seems obvious that investors should avoid declining businesses, but sometimes the share prices can seem so low, as compared to the cash they are giving out in dividends, that it can lure in investors none the less. As a whole, trying to find some remaining life in a dying business is not a strategy Warren Buffett recommends, even though he began his career searching for “cigar butt” businesses. He notes that “the same amount of energy and intelligence brought to other types of businesses is just going to work out better.”
“Generally speaking, it pays to stay away from declining businesses,” Warren Buffett said at the 2012 Berkshire Hathaway Annual Meeting. “It’s very hard. You’d be amazed at the offerings of businesses we get where they say, you know, it’s — I don’t want to upset Charlie, but they say, you know, it’s only six times EBITDA, and then they project some future that doesn’t have any meaning whatsoever. If you really think a business is declining, most of the time you should avoid it. . . . The real money is going to be made by being in growing businesses, and that’s where the focus should be.”
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.
With so much talk about growth stocks versus values stocks, Warren Buffett notes that growth is a form of value. Using insurer GEICO as an example, he believes that you can add projected growth to a company’s assets, and in the case of an insurance company, to its float. That is provided that you know a company is going to grow.
“I think it’s quite rational to assume a significant underwriting profit at GEICO over the next decade or two decades, and I think it’s likely that it will have significant growth, Warren Buffett said at the 2012 Berkshire Hathaway Annual Meeting. “And both of those are value, items of enormous value. So that adds to the present float value. . . .”
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.
As the world’s most successful investor, Warren Buffett often gets asked his advice on building a fortune. He credits Charlie Munger with the metaphor of a snowball.
“Start young. Charlie’s always said that the big thing about it is we started building this little snowball on top of a very long hill. So we started at a very early age in rolling the snowball down,” Buffett explained at the 1999 Berkshire Hathaway Annual Meeting. “And, of course, the snowball, the nature of compound interest is it behaves like a snowball of sticky snow. And the trick is to have a very long hill, which means either starting very young or living very, to be very old.”
Buffett’s full explanation about building your own fortune
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.
Warren Buffett recognizes that stock market prices periodically get disconnected from fundamentals. For Buffett, it’s both a caution and an opportunity.
“People get captivated simply by the notion of rising prices without going back to the underlying rationale. And that’s when you get very dangerous conditions in terms of possible bubbles,” Warren Buffett said at the 1997 Berkshire Hathaway Annual Meeting.
Buffett notes that this applies to the market’s extremes both going up and falling.
“It’s just people behave in extreme ways in markets,” he adds. “And over time, that’s very good for people that keep their heads.”
Buffett’s full explanation on bubbles and market extremes
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.
New types of businesses are popping up all the time. It is the nature of the business world that people throw their hats in the ring and launch new enterprises. For Warren Buffett, as a long term investor, he is looking for businesses that have a high barrier to entry that keeps them from being swamped with competitors.
“There are some industries that are just never going to have barriers to entry,” Warren Buffett said at the 2012 Berkshire Hathaway Annual Meeting. “And in those industries, you better be running very fast because there are a lot of other people that are going to be running and looking at what you’re doing and trying to figure out, you know, what your weakness is or what they can do a little bit better.”
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.
The news is full of headlines. On any given day the Federal Reserve is taking an action (or indicating that it won’t take any), trade relations are going well or going badly, or the IMF is making a prediction on economic growth. So, does any of this plethora of news matter to Warren Buffett when he makes an investment decision? Not in the slightest. “There’s always going to be good and bad news out there,” Buffett notes.
“We look to value, and we don’t look to headlines at all,” Warren Buffett said at the 2012 Berkshire Hathaway Annual Meeting. “If we find a business that we think we understand, and we like the price at which it’s being offered, we buy it. And it doesn’t make any difference what the headlines are. It doesn’t make any difference what the Federal Reserve is doing, and it doesn’t make any difference what is going on in Europe. We buy it.”
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.
If you look at the mistakes that investors commonly make, one is not truly understanding their investment, and another is leveraging a poorly understood investment through borrowing. Combining those two, as Warren Buffett points out, usually means that investors are really heading for trouble.
“Any time you combine ignorance and borrowed money, you can get some pretty interesting consequences,” Warren Buffett said at the 1994 Berkshire Hathaway Annual Meeting. “The ability to borrow enormous amounts of money combined with a chance to get either very rich or very poor very quickly, has historically been a recipe for trouble at some point.”
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.
Whenever inflation kicks up, gold always gets touted as an inflation hedge. However, Warren Buffett is quick to point out that there is nothing special about gold in that regard, and, most importantly, that he always prefers productive assets to non-productive assets.
“People, historically, have felt that was the first refuge from a currency that was going to decline in value. But, so is a barrel of oil. So is an acre of land. So is a piece of Coca-Cola. So is See’s Candy,” Warren Buffett noted at the 2005 Berkshire Hathaway Annual Meeting. “See’s candy, if the dollar goes down fifty percent, we will be selling See’s candy for double the present price. We’ll be getting the same real price for See’s candy. People will work the same number of minutes or hours per week in order to buy a pound or two-pound box of the candy. So we would much prefer some asset that is going to be useful whether the currency is worth what it is today, or ten percent of what it is today, or whether people are using seashells in order to transact business. Because people will go on eating and they’ll go on drinking and doing various things. And their preferences will translate, in real dollars, into more or less the same economics for us. And we would not trade the ownership of those kind of assets for us for a hunk of yellow metal, which has very little real utility except for people who are looking to flee from the dollar and, in our view, really haven’t thought through the consequences of what fleeing would — where they should flee… My dad was a huge gold enthusiast. So I sat around the dinner table…We sat around listening to the virtues of gold, and that was in, we’ll say, 1940. And gold, at that time, was $35 an ounce. And we would’ve had some storage and insurance costs. And, you know, here it is, 65 years later. World wars, nuclear bombs, all kinds of things. And the compound rate from $35 to a little over $400, less those expenses, is not something that causes me to salivate.”
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.