Individual investors benefit when investing greats share their wisdom.
Warren Buffett, Benjamin Graham, Joel Greenblatt, Seth Klarman, Peter Lynch, and Phil Fisher are all investing greats who have written books and/or shared their wisdom in annual reports.
It’s hard to overstate how much investors have to gain by studying these investors.
The returns generated by the investors covered in Invest Like The Best are simply remarkable.
This article will provide actionable investing quotes from six of the world’s greatest investors.
Warren Buffett’s $70+ billion fortune makes him one of the wealthiest men in the world. Warren Buffett’s quotes are concise and filled with investing wisdom.
Warren Buffett also stands out among the investors on this list because he is still actively investing today, despite being more than 80 years old. This means we can piggyback off of his investing success by studying the portfolio of his investment conglomerate Berkshire Hathaway.
Over the years Warren Buffett has evolved from a strict value investor to an investor that looks for shareholder-friendly businesses with strong competitive advantages trading at fair or better prices. Warren Buffett’s portfolio is loaded with dividend growth stocks like The Coca-Cola Co (NYSE:KO).
Warren Buffett’s approach to investing is to buy excellent businesses and let them compound wealth over time.
“Time is the friend of the wonderful company, the enemy of the mediocre.”
Time is the friend of the wonderful company because over time wonderful companies will continue to gain market share, grow earnings, and reward shareholders. For a mediocre business, time is the enemy. The mediocre business will slowly succumb to the competitive forces of free markets.
Buffett also believes that wonderful companies can still make attractive investments when they are purchased at not-necessarily-wonderful prices. One of his most famous quotes illustrates this point nicely:
“It’s far better to buy a wonderful business at a fair price than a fair business at a wonderful price.”
Time + wonderful business = wealth.
Time + fair business = mediocre results.
When one buys a fair business at a wonderful price, they are relying on the stock market to generate their returns; hoping that the business’ valuation will rise. When one buys a wonderful business, they can sit back and let the business grow over time; increasing value on its own.
So what makes a wonderful business? Buffett believes that wonderful businesses are positioned to perform well regardless of future changes to consumer behavior, the economic environment, and the technological landscape. This has led to Buffett stating the following:
“Our approach is very much profiting from lack of change rather than from change.”
Businesses that must undergo continuous change to stay relevant will eventually lose pace with the market. Businesses that rarely have to change their products have a much lower risk of product obsolescence.
What will the smartphone industry look like 20 years from now? I have no idea. Very few people (could anyone?) could have predicted the rise of Apple 20 years ago.
On the other hand, think about the spice industry. McCormick & Company, Incorporated (NYSE:MKC) is the largest player in this industry. I find it very difficult to imagine that people’s preferences for flavoring foods with spices will change much over the next 20 years – or the next 100 years.
Changing industries are exciting, but they reduce the durability of a businesses’ competitive advantage. With that said, excitement is not necessary for strong investment returns. Investing is certainly a world where slow and steady wins the race.
“I don’t look to jump over 7-foot bars; I look around for 1 foot bars that I can step over.”
Warren Buffett’s strategy of buying excellent businesses reduces risk and complexity. It isn’t hard to see that Coca-Cola or American Express Company (NYSE:AXP) have strong competitive advantages. It is orders of magnitude more difficult to examine a biopharmaceutical start-up’s expected value. There is no reason to take chances on over-complicated analysis when you can buy easy-to-understand high-quality businesses. There are no bonus points for difficulty in investing.
Warren Buffett’s investment strategy matches well with dividend growth investing. While Warren Buffett does not require the businesses in which he invests to pay dividends, most of them do. All of Warren Buffett’s top 5 holdings pay increasing dividends year-after-year – giving them a solid chance of eventually joining the Dividend Aristocrats (stocks with 25+ years of consecutive dividend increases). Coca-Cola, one of Buffett’s largest position, is already an Aristocrat.
Benjamin Graham has been called “the father of Value Investing” and “the dean of Wall Street,” and probably has had more intellectual influence than any other investor on this list. His two critically-acclaimed books Security Analysis and The Intelligent Investor introduced important concepts like Mr. Market and the margin of safety and have had a tremendous amount of influence on millions of investors worldwide.
Warren Buffett has said the following about Graham’s book The Intelligent Investor:
“I read the first edition of this book early in 1950, when I was nineteen. I thought then that it was by far the best book about investing ever written. I still think it is.”
What differentiated Benjamin Graham from the other investors of his day? Well, Graham was one of the first investors to become laser-focused on price. Graham was not interested in just prices, but how they related to yardsticks of business value (such as earnings and book value).
Overall, one of the defining charcteristics of Graham’s research style was the desire to quantify every aspect of a company’s characteristics. This can be seen from the beginning of The Intelligent Investor, where Graham writes:
…we hope to implant in the reader a tendency to measure or quantify. For 99 issues out of 100 we could say that at some price they are cheap enough to buy and at some other price they would be so dear that they should be sold. The habit of relating what is paid to what is being offered is an invaluable trait in investment. In an article in a women’s magazine many years ago we advised the readers to buy their stocks as they bought their groceries, not as they bought their perfume. The really dreadful losses of the past few years (and on many similar occasions before) were realized in those common-stock issues where the buyer forgot to ask ”How much?”
As alluded to previously, Graham was also the creator of the concept of a “margin of safety.” A margin of safety is the difference between an investor’s purchase price and the intrinsic value of the investment in question. The larger a margin of safety, the better for the investor.
Graham introduces the margin of safety with the following passage in The Intelligent Investor:
“The margin-of-safety idea becomes much more evident when we apply it to the field of undervalued or bargain securities. We have here, by definition, a favorable difference between price on the one hand and indicated or appraised value on the other. That difference is the safety margin. It is available for absorbing the effect of miscalculations or worse than average luck. The buyer of bargain issues places particular emphasis on the ability of the investment to withstand adverse developments. For in most such cases he has no real enthusiasm about the company’s prospects. True, if the prospects are definitely bad the investor will prefer to avoid the security no matter how low the price. But the field of undervalued issues is drawn from the many concerns-perhaps a majority of the total-for which the future appears neither distinctly promising nor distinctly unpromising. If these are bought on a bargain basis, even a moderate decline in the earning power need not prevent the investment from showing satisfactory results. The margin of safety will then have served its proper purpose.“
One of Graham’s other grand contributions to the field of investing is the psychological concept of “Mr. Market,” which was referenced in the introduction to this section.
Mr. Market is an analogy to help investors understand and endure the volatility that is inherent in the stock market. Graham explains Mr. Market as follows:
“Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, 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.
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.
The true investor is in that very position when he owns a listed common stock. He can take advantage of the daily market price or leave it alone, as dictated by his own judgment and inclination. He must take cognizance of important price movements, for otherwise his judgment will have nothing to work on. Conceivably they may give him a warning signal which he will do well to heed-this in plain English means that he is to sell his shares because the price has gone down, foreboding worse things to come. In our view such signals are misleading at least as often as they are helpful. Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.”
The Mr. Market analogy helps investors remember that the price movements within the stock market can sometimes be highly irrational, and helps investors to weather – and even benefit from – the resulting volatility.
Joel Greenblatt is a 60 year old value investor and author. He managed the hedge fund Gotham Capital from 1985 to 2006 and generated absurd annual returns of 40% a year. Joel Greenblatt’s books include You Can Be a Stock Market Genius and The Little Book that Beats the Market.
Joel Greenblatt now employs formula-based value investing. His strategy involves looking for businesses with high margins trading at a low price in relation to earnings. He currently has several mutual funds available (all with very high expense ratios).
Rule/formula based investing has a distinct advantage. It eliminates bias and emotion from the investing process. As a formula-based investor, Joel Greenblatt recognizes the advantages of this approach.
“Decisions to buy and sell stocks should be based solely on the investment merits.”
Joel Greenblatt, like all the investors discussed above, seeks to limit downside risk. His downside risk protection method is similar to that of Warren Buffett and Seth Klarman; Joel Greenblatt looks for a margin of safety. As mentioned, a margin of safety refers to the difference between the estimate of what you think a business is worth and what it is trading for on the stock market. The larger the discount on the market, the more margin for error you have in your value calculation.
“One way to create an attractive risk/reward situation is to limit downside risk severely by investing in situations that have a large margin of safety.”
In addition to the margin of safety, Joel Greenblatt also recommends investing in situations where you are both knowledgeable and confident.
“It makes sense that if you limit your investments to those situations where you are knowledgeable and confident, and only those situations, your success rate will be very high.”
The underlying value of businesses does not bounce around much from day-to-day. Stock prices, however do.
“Prices fluctuate more than values—so therein lies opportunity.”
Rapidly fluctuating stock prices create opportunities when price falls below value. Patient investors must have the discipline to both buy and hold positions where price falls below value.
“Time is the currency of everyone’s life.”
Dividend growth investors prefer buying and holding high-quality businesses for the long run. Businesses that reliably pay increasing dividends year-after-year provide rising income for dividend growth investors. When funds are invested in high-quality businesses, little else must be done. This builds wealth while taking less time than other investment methods. Day trading, for example, requires constant attention on a daily basis. This reduces the time you have to pursue other, more rewarding non-investment activities.
Seth Klarman is the 60-year-old founder of the Baupost Group hedge fund. Baupost Group has about $30 billion in assets under management.
Seth Klarman is a risk-averse value investor. He wrote the preface for the 6thedition of Security Analysis. Seth Klarman’s own book, Margin of Safety sells for over $1,000.
Like Warren Buffett, Seth Klarman prefers to invest for long periods of time. While he is not in the ‘hold forever’ camp, Seth Klarman does advocate a long-term mindset.
“The single greatest edge an investor can have is a long-term orientation.”
The above Seth Klarman quote is incredibly powerful. It spells out in no uncertain terms how important investing for the long-run is. Having a long-term orientation prevents speculation by forcing investors to focus on business fundamentals rather than short-term price movement.
Indeed, the ability to sell when you want to instead of when you have to is tremendously powerful.
“The trick of successful investors is to sell when they want to, not when they have to.”
To have a long-term orientation, one must not be forced to sell their stocks. Dividend stocks are unique in their ability to provide both current income while maintaining long-term growth prospects. The ultimate goal of building a dividend growth portfolio is to have dividend income fully cover all expenses. In this scenario, investors only have to sell when they want to, never because they have to.
We described Klarman as a risk-averse value investor in the introduction to this section. Klarman has a laser-sharp focus on downside protection and loss avoidance.
“The avoidance of loss is the surest way to ensure a profitable outcome.”
Taking unnecessary risk will lead to large losses. Loss avoidance is critical for investing success. When investors focus on minimizing downside risk, the upside tends to take care of itself. Investing in businesses with strong competitive advantages trading at fair or better prices is perhaps the best way to avoid long-term losses.
Klarman has implemented the heavily-quantified characteristics taught by Benjamin Graham in Security Analysis and The Intelligent Investor. With that said, he warns against being precise instead of being accurate.
“Many investors insist on affixing exact values to their investments, seeking precision in an imprecise world, but business value cannot be precisely determined.”
Investing would be extremely easy if there were a way to precisely determine the value of a business. Discounted cash flow analysis uses various inputs and estimates and produces an ‘exact business value’. Of course, this value is not ‘real’, it is only a projection based on the various inputs used in the formula. investors would be wise to avoid trying to label businesses with an exact value as such a task is impossible.
Klarman also recognizes the importance of understanding a company’s real operations. Buying shares of a company whose business is incomprehensible is a surefire way to lose money in the stock market.
“If you don’t quickly comprehend what a company is doing, then management probably doesn’t either.”
As discussed in the Warren Buffett section above, investors don’t get bonus points or extra return for degree of difficulty. If a business is exceptionally difficult to understand, then anyone’s analysis will likely miss important details. Further, it is more difficult to manage a complex business. Simple business models are easier to manage, measure, and improve.
Peter Lynch averaged an investment return of 29.2% between 1977 and 1990 when he ran the Magellan Fund. He has shared his investing wisdom in several books including One up on Wall Street and Beating the Street.
Peter Lynch’s investing philosophy focuses on buying fast-growing stocks (typically small-caps) for cheap. Peter Lynch pioneered the PEG ratio. The PEG stand for price-to-earnings-to-growth. It is the P/E ratio divided by the growth rate. A PEG ratio under 1 signals a ‘buy’ for Peter Lynch.
Like Warren Buffett and Seth Klarman, Peter Lynch likes simple stocks – maybe even more than the two previously mentioned investors. The two quotes below emphasize simplicity in investing.
“The simpler it is, the better I like it.”
“If you’re prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won’t get bored.”
The ‘5th grader’ test above is an excellent litmus test to see if you really understand what a business does. If a 5th grader can understand the business model, then the company is likely very focused on what it does best.
“Go for a business that any idiot can run – because sooner or later, any idiot is probably going to run it.”
In keeping with the simplicity narrative, Peter Lynch recommends investing in businesses that ‘any idiot can run’. This means businesses with strong competitive advantages that are very straightforward. It is an unfortunate truth that often times the CEO’s and top-level executives are the best at climbing the corporate ladder, and not necessarily the best at running a business (this, of course, is not always the case). A fantastic business has a much better chance at ‘weathering the storm’ of incompetent management versus a mediocre business.
“Stocks aren’t lottery tickets. There’s a company attached to every share.”
Many investors forget that stocks are fractional ownership of a business. They are not random ticker symbol lottery tickets that bounce up and down in value. Just because the stock market allows you to buy and sell every day does not mean it is advisable to do so. If you own your own business or are in a partnership, you would never consider selling every day. Why would it be any different in with fractional ownership of a larger business?
“Owning stocks is like having children — don’t get involved with more than you can handle.”
Peter Lynch (and Warren Buffett and Seth Klarman) advocates running a relatively concentrated portfolio. There is no point in buying 100’s of securities – it is impossible to track the business operations of all of them. Rather, investors should invest in businesses they know and understand well. Over diversifying leads to mistakes.
Phil Fisher is the secretive investor who ran the family office Fisher & Co., which invested money on behalf of approximately a dozen wealthy families. His investment knowledge has been distilled to the public through his excellent book Common Stocks and Uncommon Profits.
Phil Fisher stands out among the investors covered in this article because he is a devoted growth investor. He believed in buying companies that are growing far faster than the other companies in their peer group.
“The greatest investment reward comes to those who by good luck or good sense find the occasional company that over the years can grow in sales and profits far more than industry as a whole.”
Two other components of his investment style stand out: his long-term investing style and his contrarian nature. These components of Phil Fisher’s investing style can be seen in the following passage from Common Stocks and Uncommon Profits:
“In studying the investment record both of myself and others, two matters were significant influences in causing this book to be written. One, which I mention several times elsewhere, is the need for patience if big profits are to be made from investment. Put another way, it is often easier to tell what will happen to the price of a stock than how much time will elapse before it happens. The other is the inherently deceptive nature of the stock market. Doing what everybody else is doing at the moment, and therefore what you have an almost irresistible urge to do, is often the wrong thing to do at all.”
Fisher also believed that every investor’s first-hand experience as a consumer was tremendously valuable for finding investment opportunities. This approach, which he calls “scuttlebutt investing,” is quite similar to Peter Lynch’s research style.
“Every time you shop in a store, eat a hamburger or buy new sunglasses you’re getting valuable input. By browsing around you can see what’s selling and what isn’t.”
Above all, though, Fisher’s most iconic characteristic is his long-term orientation. This can be seen in Fisher’s best-known quote, which is shown below.
“If the job has been correctly done when a common stock is purchased, the time to sell it is—almost never.”
All of the investors mentioned in this article have excellent investing records. The combined wisdom of these investors shows what works in investing. In summary, investors should look for easy to understand businesses with strong competitive advantages. These businesses should be held for the long-run, or until they no longer have competitive advantages.
Investors should look for undervalued businesses. An excellent business trading at the value of a mediocre business is undervalued. If you buy quality for a normal price, you get a bargain. The 8 Rules of Dividend Investing use many of the ideas of great investors to find high quality dividend stocks trading at fair or better prices suitable for long-term holding.