5 Quotes By Warren Buffett That Will Change How You Think About Investment

30th August 2016 marked the 86th birthday of the most prolific investors and philanthropists in the history of mankind – Warren Buffett.

Warren Buffett stands for all that is good – integrity, intelligence and altruism. His humility, simplicity and insatiable thirst for knowledge further enhance his character. He has learned many lessons the hard way. But he has never shied from sharing them freely. His relentless focus led to the Berkshire Hathaway stock price increasing by 1,826,163% in the last 50 years.

Warren Buffett’s profound knowledge has not just helped shareholders of Berkshire Hathaway reap rewards. It has also helped people become wiser about money and life. Here are a few of his deepest lessons quotes:

1. “I don’t work to collect money.”

Almost 90% of Warren Buffett’s wealth goes to the Bill and Melinda Gates Foundation. He bought an apartment in Omaha for $31,500 in 1958 and still lives in it. “My life would be worse if I had 6 or 8 houses”, he says. Buffett doesn’t work to earn money.

Instead, money gives him something unparalleled – the freedom to do what he loves. Buffett loves to study companies, and invest in fundamentally strong ones.

Don’t work for money. It will keep you trapped every day in the mundane. It will make you dull. Instead, earn money so that you can achieve independence and do what you love.

2. “It takes 20 years to build a reputation and 5 minutes to destroy it.”

Remember what happened to Nestle when the Maggi fiasco occurred? The company lost a market cap of almost ₹10,300 crore in a single week. This is not a discussion on whether the tests conducted by the company and regulators were legitimate. This shows how fragile any reputation is.

Warren Buffett, through this quote, wanted to highlight the significance of integrity. But I want to use it to highlight an important rule of investment – not putting all your eggs in one basket. Think Enron. The CEO, Kenneth Lay, was one of the most respected executives in corporate America. That was, until the malpractices in the firm were exposed, and it went bankrupt. Investors lost millions overnight.

The judgmental nature of human beings, and finicky nature of short-term investors, is enough to reduce a painstakingly built reputation to ashes within minutes. Don’t remain emotionally attached to a single firm or investment vehicle. Place your eggs in various baskets and protect them.

3. “Stick with your circle of competence.”

When, renowned investor Mason Hawkins was asked what impressed him about Warren Buffett the most, he said, “his passion in knowing where his strengths are and keeping his focus on those strengths.”

Unlike most investors, he sticks to businesses he understands and believes in. This disciplined habit keeps his funds safe. “You have to stick within what I call your circle of competence. You have to know what you understand and what you don’t,” he said once. “It’s not terribly important how big the circle is. But it’s terribly important that you know where the perimeter is.”

Unfortunately, many investors become overconfident with a couple of (lucky) bets. This behavior is not specific to investors. It is a common trait in human beings. We overestimate our area of expertise. Or we get sucked into ‘investing’ in what we don’t understand because we get a ‘tip’ that we can make a lot of money. And that, my friend, is the beginning of the end.

Investment is an avenue where emotion has no place. Set a goal and stick to it. And stay away from what you don’t understand. There is no such thing as easy money.

4. “Price is what you pay. Value is what you get.”

Often, we get carried away by the cost of something cheap. But we forget one thing – we spend on what is cheap, but invest on what is good.

Almost always, money spent in something cheap is sunk. But money spent on something reliable – even if it’s slightly expensive – generally provides a return. Hence, it is called an investment.

So look for sound fundamentals. To succeed as an investor, Ben Graham suggests, build the ability to estimate a business’s true worth, or “intrinsic value,” which may be entirely separate from its stock market price. A business’s intrinsic value could be estimated from its financial statements – the balance sheet and income statement.

But don’t invest at a market-inflated value. Compare the company’s P/E ratio to that of the category, the market valuation to the book value, and take sound decisions. 

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

“If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible…… Unless you are a liquidator, that kind of approach to buying businesses is foolish,” Warren Buffett wrote in 1989.

According to him, the original ‘bargain price’ doesn’t turn out to be a bargain. Because no sooner is a problem in a difficult business solved that another one raises its head. There is never just one cockroach in the kitchen.

Buffett can’t be wrong, at least not for us. So let’s take a cue from him. Don’t invest in a promising business if the stock price falls really low. Wait some time and be assured that the business has sorted its deep-rooted problems out.

Remember what happened to investors of Kingfisher Airlines? Or remember GTL Infrastructure? They traded at 106 in January 2008, but haven’t gone higher than ₹4 since 2013.

Did you notice something? These quotes are about investment. But you can apply them to life as well. We are made to believe that life, like investment, is complex. That we must do many things together if we truly want to be as good as others. But the successful people keep life simple. They do a few things, and do them really well.

You can make money work for you with minimal risk and maximum security. And you can utilize those investment gains to build a better quality of life. After all, isn’t that what you want?

Vishal is the founder of Aryatra, a venture to help individuals improve their productivity and live more fulfilled lives. He also is a digital marketing consultant helping businesses generate revenue from their online presence.