The Warren Buffett gems you haven’t heard before

Important information -  the value of investments and the income from them can go down as well as up, so you may get back less than you invest. 

Warren Buffett, the world’s most celebrated investor, has announced his retirement. He is famed not just for his investment success but for his ability to communicate his beliefs and methods in memorable everyday language. Some of his sayings – ‘be greedy only when others are fearful’, for example – have entered investing folklore. But his letters to shareholders of his company, Berkshire Hathaway, published every year since 1977, are a treasure trove of investment wisdom. We read through them – a lengthy but pleasurable task – to bring you some of his best, and most useful, aphorisms.

You can read in full all of his letters to Berkshire Hathaway shareholders here.

We have not edited the quotes, other than (where shown) to shorten them, so be prepared for American spelling and punctuation. 

The case for investing in shares (and staying invested) 

Buffett has always expressed optimism about the long-term prospects of the American economy and its stock market. Savers in Britain can – and do – invest in America via tracker funds or actively managed ones (see Fidelity’s Select 50, favourite funds selected by experts, here). Here’s what Buffett said in 2013: 

‘American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors … are in a game that is heavily stacked in their favor… Since the basic game is so favorable, Charlie [Munger, Buffett’s late business partner] and I believe it’s a terrible mistake to try to dance in and out of it … The risks of being out of the game are huge compared to the risks of being in it.’ 

His advice for the ‘know-nothing’ investor – tracker funds and drip-feeding 

Many people want to invest but have no wish to choose individual stocks or funds. Many also fear investing a large sum in the markets only to see its value fall severely should a crash follow. Buffett has a solution for both: 

‘An investor who does not understand the economics of specific businesses [but] nevertheless believes it in his interest to be a long-term owner of American industry… should both own a large number of equities [shares] and space out his purchases. By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals.’ (1994) 

He says investors who follow his advice and invest regularly should, counter-intuitively, cheer when stock markets fall, because they will be adding to their investments more cheaply:

‘If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall … This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.’ (1998) 

But he cautions investors to have realistic expectations for stock market returns. He says company profits, which over the long term largely determine share prices, can be expected to rise in aggregate only at the rate at which a country’s economy grows. This is how he put it in 2000: 

‘We see the growth in corporate profits as being largely tied to the business done in the country (GDP), and we see GDP growing at a real [after-inflation] rate of about 3%. In addition, we have hypothesized 2% inflation … If profits do indeed grow along with GDP, at about a 5% rate, the valuation placed on American business is unlikely to climb by much more than that. Add in something for dividends, and you emerge with returns from equities that are dramatically less than most investors have either experienced in the past or expect in the future.’ 

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How he handles stock market peaks and troughs 

Although he generally favours remaining invested, Buffett does warn of the dangers of investment bubbles: 

‘A pin lies in wait for every bubble. And when the two eventually meet, a new wave of investors learns some very old lessons: First, many in Wall Street – a community in which quality control is not prized – will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest.’ (2001) 

Or more succinctly in 2012: 

‘What is smart at one price is dumb at another.’  

Or as he put it in 2004, when he was holding on to cash instead of investing it at prices he felt uncomfortable with: 

‘Our capital is underutilized now, but that will happen periodically. It’s a painful condition to be in – but not as painful as doing something stupid.’ 

When share price falls present an opportunity, however, his advice is to take full advantage, with no half measures: 

‘Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble.’ (2010) 

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No place for gold

Gold has performed spectacularly in recent months but Buffett is no believer in the metal as a long-term means to generate wealth: 

‘Gold … has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.’ (2012) 

This is the first in a short series of summaries of Buffett’s most useful quotes. The next will focus on his advice for investors who like to pick their own stocks.  

If you’ve got a burning question you want to ask, why not drop us a line. Ask us your question. 

• Read: Generate your retirement income the Warren Buffett way 
• Read: Warren Buffett’s greatest lessons for ordinary investors
• Read: What Warren Buffett says – and does – when markets fall