Five for Friday

In this week's special edition of Five for Friday, Ross pays homage to Warren Buffett in quotes.

1. “Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease.” 

From Warren Buffett's 1986 letter to Berkshire Hathaway shareholders. Stock prices have and always will be more volatile than a company or economy’s underlying fundamentals. Why? Because of the importance and unpredictability of market participants’ psyches and emotions—in other words, because outbreaks of fear and greed will forever occur. Long-term investing works because capitalism incentivizes innovation via competition for profits. The stock market has gone up over time because so too have the earnings of its underlying firms. But over the short-term, sentiment and behavior are the primary drivers of price action. This makes trying to regularly time the market difficult, if not impossible.  

2. “It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.”   

From the 1989 shareholder letter. Buffett discusses how his approach shifted from deep value, “cigar butt” investing toward buying great businesses at reasonable prices (Peter Lynch espousing a similar sentiment: “go for a business that any idiot can run—because sooner or later, any idiot probably is going to be running it”). A related lesson that might be more applicable in today’s market: many great companies are never “cheap.” Many of the best-performing stocks over the last few decades started out looking expensive (e.g., high share price to earnings ratio) and only got more expensive as the market recognized their potential. The price one pays will always be a key factor in an investment’s return, but it should not rise above the quality of the business and its leaders, especially when investing for the long term. As Buffett concludes: “In a difficult business, no sooner is one problem solved than another surfaces—never is there just one cockroach in the kitchen.”  

3. “The stock market is a device for transferring money from the impatient to the patient.”   

Time is the ally of the long-term investor. The odds that any given day in the stock market will be positive are barely better than a coin flip, but one’s probability of a positive investing experience increase with time (both in terms of success rate and overall return). For instance, even though the S&P 500 has been positive on just 50.6% of days since 1928, it would still have turned $100 in $1.4 million over that same timeframe. As has been said, “Patience is bitter, but its fruit is sweet.”  

4. “Never invest in a business you cannot understand.”   

As relevant today as ever given the rapid pace of technological change and the growing menu of investments available. In fact, I would expand Buffett’s quote beyond common stocks to all assets: from newly invented asset classes like cryptocurrency to recently democratized ones like private and alternative investments, it is important to have a grasp on why you own something and how you might expect the asset to perform in different environments. I believe a strong understanding of one’s investments (return drivers, risk factors, etc.) provides the conviction necessary to withstand the inevitable market volatility—and avoid panic-selling during downturns.

5. “In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.”   

From a now-famous op-ed written at the depths of the 2008 Financial Crisis (echoing J.P. Morgan’s 1895 observation that “the man who is a bear on the future of the United States will always go broke”). Things are never perfect—and are sometimes far from it—but perfection has never been a prerequisite for companies to innovate and earn money…or for investors to build wealth by investing in one of the world’s largest and most productive private sectors.     

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