Wednesday 4 July 2012

Some of the Sage's less well-known sayings are perfect advice for times like these.


Published on 24 May 2012

Without doubt, Warren Buffett, the boss of Berkshire Hathaway (NYSE: BRK-B.US), has said some very smart things. Which, when you think about it, isn't surprising.
Because he wouldn't have made so much money in the first place if he wasn't smart, and -- let's face it -- he's a gregarious chap who's very happy to share his thoughts with those investors who have put their money into Berkshire Hathaway.
At this year's investor-fest in Omaha, for instance, Buffett and co-investor Charlie Munger once again held the stage for several hours, fielding questions from all and sundry.

Sage words

The trouble is, when it comes to the answers, many of us have selective hearing. One result of this is that some of his best known quotes are only partly reproduced.
Take, for instance, Buffett's famous remark that "our favourite holding period is forever". What it doesn'tmean is cling like a dog with a bone to the dross in your portfolio. Because Buffett can, and does, sell.
The full quote is this: "When we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever."
And that, I think you'll agree, is a rather different proposition.
Another problem, frankly, is wishful thinking. Personally, I think that this famous quote is one of his worst quotations, devoid as it is of anything that an investor can actually do or influence: "Rule No. 1: never lose money; rule No. 2: don't forget rule No. 1."
What does it mean? What are you actually supposed to take away from it? It might be a worthy aspiration, but it certainly isn't actionable advice.

Cometh the hour

But, interestingly, it turns out that three of his less well-known quotes are loaded with actionable advice. And it's advice, what's more, that plays perfectly to today's turbulent and nervous markets.
And without further ado, here they are:
  • "The best thing that happens to us is when a great company gets into temporary trouble... We want to buy them when they're on the operating table."
  • "The most common cause of low prices is pessimism -- sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism, but because we like the prices it produces."
  • "The stock market is a no‑called‑strike game. You don't have to swing at everything -- you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!'"
The common refrain running through all three? It's perhaps best summarised by yet another Buffett quote: "You pay a high price for a cheery consensus."
In short, you'll make the most money by sitting on your hands in the good times, and then buying good businesses in the bad times.
And if that doesn't sound like a recipe for success in today's turbulent times, I don't know what does.

Wired for failure

Now, human nature being what it is, many investors do the exact opposite.
When they're feeling buoyant and bullish, they pile in to the stock market. Look no further than 1996-1999, for instance. Or 2005-2006.
Then, when stock markets crater, they sell -- as they did in 2008 and 2009, to choose another example.
And they certainly don't buy when the market is at rock bottom. Which led to an awful lot of investors getting caught out by the meteoric rise of the FTSE 100 in the months that followed March 2009.

Looking for bargains

Hopefully, you'll already have your eyes on stocks priced at bargain levels.
Personally, I'm looking at topping up my holdings in BP (LSE: BP), BAE Systems (LSE: BA) and GKN(LSE: GKN). The news surrounding the first two, in particular, is gloomy. But the basic businesses are sound.
Or I may just throw some money at the index, via one of my tracker funds, or via Vanguard's new low-cost FTSE 100 ETF, the Vanguard FTSE 100 ETF (LSE: VUKE) -- which is now live and trading, by the way.
That's just me, of course. But if you'd like to know what Warren Buffett himself has loaded up on, then a free Motley Fool special report -- "The One UK Share Warren Buffett Loves" -- can be in your inbox in seconds.

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