Investing is unique in that there is tremendous opportunity to learn from the best in the business.
Investors like Warren Buffett, Seth Klarman, Joel Greenblatt and Benjamin Graham have made a concentrated effort to educate investors everywhere through their writing, speeches, and other communications.
What can past market crashes teach us about the current one?
This article will summarize some of the best quotes from the most talented investors in the world, and describe how we can learn from the teachings of these remarkable investors.
Warren Buffett is the Chairman and Chief Executive Officer of Berkshire Hathaway. The investment conglomerate owns a number of wholly-owned subsidiaries like Dairy Queen, GEICO, and Fruit of the Loom, while also owning a diverse basket of marketable securities like Coca-Cola (KO), Apple (AAPL), and American Express (AXP).
Warren Buffett is known for being a notoriously long-term investor, taking significant positions in high-quality businesses and holding them for decades. This is largely possible because of the quality of the businesses he invests in:
“Time is the friend of the wonderful company, the enemy of the mediocre.”
Buffett, although known primarily as a value investor, has shown a willingness to pay a higher price for these types of high-quality businesses.
“It’s far better to buy a wonderful business at a fair price than a fair business at a wonderful price.”
This begs the question – what determines a business’ quality?
Buffett believes that the key characteristic of a high-quality business is the ability to prosper through periods of dramatic change. In other words, he wants to buy businesses that will profit from a lack of change (rather than depending on specific change, which can be far more unpredictable).
“Our approach is very much profiting from lack of change rather than from change.”
Seth Klarman is the billionaire hedge fund manager who runs the Baupost Group, a risk-averse value investment firm.
The most notable characteristic of Klarman’s investment style is his long-term mindset. He wants to buy businesses trading below his perception of their intrinsic value and then patiently wait until they experience meaningful price appreciation.
“The single greatest edge an investor can have is a long-term orientation.”
A subtle component of this investment strategy is liquidity. Klarman wants to be a provider of liquidity, not a demander of liquidity. This allows him to be the buyer of the most highly mispriced assets on the stock market, usually during periods of economic turmoil.
“The trick of successful investors is to sell when they want to, not when they have to.”
While this sounds sophisticated, it is far from risky. Klarman is extremely risk-averse. He believes that avoiding loss is one of the critical components to a successful investment approach.
“The avoidance of loss is the surest way to ensure a profitable outcome.”
Joel Greenblatt is the founder of Gotham Capital (a hedge fund which has since been discontinued) and Gotham Asset Management, a mutual fund company. Both entities have had spectacular investment returns and beaten the market over meaningful periods of time.
One reason why Greenblatt’s performance has been so strong is his ability to remove emotions from his portfolio management decisions. As the following quote illustrates, investment merit is the only factor that Greenblatt allows to influence his investment choices.
“Decisions to buy and sell stocks should be based solely on the investment merits.”
Greenblatt avoids emotional biases, but this does not give us much insight into how he identifies investment opportunities.
Greenblatt’s strategy relies on the concept of a “margin of safety,” which was pioneered by Benjamin Graham – another influential investor who we’ll discuss later. Essentially, Greenblatt wants to conservatively assess a security’s true value and then purchase the investment at a price far lower than that.
“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.”
Price fluctuations are the main reason why such interesting investment opportunities exist.
“Prices fluctuate more than values—so therein lies opportunity.”
Benjamin Graham is commonly called “the Father of Value Investing” and the “Dean of Wall Street,” and has played an important role in educating millions of successful investors (including the others discussed in this article).
There are three major philosophical influences that Graham brought to the world of investing.
The first is the laser-sharp focus on quantifying the valuation of marketable securities. In his critically-acclaimed book The Intelligent Investor, Graham wrote the following on his goal in writing the book:
“…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?”
Secondly, Benjamin Graham is famous for pioneering the aforementioned concept of a “margin of safety,” which was referred to earlier by fellow super-investor Benjamin Graham. The margin of safety is the difference between an investments true value (also called intrinsic value or fair value) and its market value. The larger a margin of safety, the better.
Lastly, Graham developed the concept of “Mr. Market” to help investors explain and endure through the irrational movements of the stock market. Graham wrote the following about Mr. Market:
“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 investors discussed in this article have many traits in common, with the most important characteristic being their remarkable track records of investment success.
There are also other similarities. The investors discussed in this article seek to buy high-quality businesses trading at fair or better prices. Quality and price are the two cornerstones of their investment philosophies.
With that in mind, the Sure Dividend Newsletter uses a quantitative ranking system to identify high-quality companies trading at attractive prices, and then provides detailed qualitative and quantitative analysis on each recommendation.
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