Quotes of 2013

A collection of quotes from 2013. All were said or written at some point during this calendar year.

Grantham: Investing in a Low-Growth World
"All corporate growth has to funnel through return on equity. The problem with growth companies and growth countries is that they so often outrun the capital with which to grow and must raise more capital. Investors grow rich not on earnings growth, but on growth in earnings per share. There is almost no evidence that faster-growing countries have higher margins. In fact, it is slightly the reverse." - Jeremy Grantham

"The fact that growth companies historically have underperformed the market – probably because too much was expected of them and because they were more appealing to clients – was not accepted for decades, but by about the mid-1990s the historical data in favor of 'value' stocks began to overwhelm the earlier logically appealing idea that growth should win out. It was clear that 'value' or low growth stocks had won for the prior 50 years at least. This was unfortunate because the market's faulty intuition had made it very easy for value managers or contrarians to outperform. Ah, the good old days! But now the same faulty intuition applies to fast-growing countries. How appealing an assumption it is that they should beat the slow pokes. But it just ain't so." - Jeremy Grantham

Buffett on Berkshire's "Powerhouse Five" & "Big Four"
"At Berkshire we much prefer owning a non-controlling but substantial portion of a wonderful business to owning 100% of a so-so business. Our flexibility in capital allocation gives us a significant advantage over companies that limit themselves only to acquisitions they can operate." - Warren Buffett

Buffett on Berkshire's Float
"If our premiums exceed the total of our expenses and eventual losses, we register an underwriting profit that adds to the investment income our float produces. When such a profit is earned, we enjoy the use of free money – and, better yet, get paid for holding it. That's like your taking out a loan and having the bank pay you interest." - Warren Buffett

"...we have now operated at an underwriting profit for ten consecutive years, our pre-tax gain for the period having totaled $18.6 billion. Looking ahead, I believe we will continue to underwrite profitably in most years. If we do, our float will be better than free money." - Warren Buffett

"So how does our attractive float affect the calculations of intrinsic value? When Berkshire's book value is calculated, the full amount of our float is deducted as a liability, just as if we had to pay it out tomorrow and were unable to replenish it. But that's an incorrect way to look at float..." - Warren Buffett

"The value of our float is one reason – a huge reason – why we believe Berkshire's intrinsic business value substantially exceeds its book value." - Warren Buffett

Warren Buffett on "The Key to Investing"
"American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor. (The Dow Jones Industrials advanced from 66 to 11,497 in the 20th Century, a staggering 17,320% increase that materialized despite four costly wars, a Great Depression and many recessions. And don't forget that shareholders received substantial dividends throughout the century as well.)

Since the basic game is so favorable, Charlie and I believe it's a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of 'experts,' or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it." - Warren Buffett

Not Picking Stocks By The Numbers
An exchange between Warren Buffett and Charlie Munger as summarized by the Wall Street Journal's live blog:

"We are looking at businesses exactly like we are looking at them if somebody came in and asked us to buy the whole business," Buffett said. He said they then want to know how it will do in ten years. 

Munger was even more forceful: "We don't know how to buy stocks by metrics ... We know that Burlington Northern will have a competitive advantage in years ... we don't know what the heck Apple will have. ... You really have to understand the company and its competitive positions. ... That's not disclosed by the math.

Buffett: "I don't know how I would manage money if I had to do it just on the numbers."

Munger, interupting, "You'd do it badly."

Buffett on Bonds and Productive Assets
"I bought a piece of real estate in New York in 1992, I have not had a quote on it since. I look to the performance of the assets. Maybe...my piece of real estate have had pull backs, but I don't even know about 'em. People pay way too— way too much attention to the short term. If you're getting your money's worth in a stock, buy it and forget it." - Warren Buffett

"...interest rates have a powerful effect on...all assets. Real estate, farms, oil, everything else...they're the cost of carrying other assets. They're the alternative. They're the yardstick." - Warren Buffett

"...the fact that there are troubles in Europe, and there are plenty of troubles, and they're not going go away fast, does not mean you don't buy stocks. We bought stocks when the United States was in trouble, in 2008 and— and it was in huge trouble and we spent 15 1/2 billion in three weeks in— between September 15th and October 10th. It wasn't because the news was good, it was because the prices were good." - Warren Buffett

"In terms of stocks, you know, stocks are reasonably priced. They were very cheap a few years ago. They're reasonably priced now. But stocks grow in value over time because they retain earnings..." - Warren Buffett
(Stocks prices were, of course, generally much lower when Buffett said this compared to now.)

"There could be conditions under which we...would own bonds. But— they're conditions far different than what exist now." - Warren Buffett

"I would have productive assets. I would favor those enormously over fixed dollars investments now, and I think it's silly — to have some ratio like 30 or 40 or 50% in bonds. They're terrible investments now." - Warren Buffett

"News is better now. Stocks are higher. They're still not— they're not ridiculously high at all, and bonds are priced artificially. You've got some guy buying $85 billion a month. (LAUGH) And— that will change at some point. And when it changes, people could lose a lot of money if they're in long-term bonds." - Warren Buffett

"...I bought a farm in 1985, I haven't had— had a quote on it since. But I know what it's produced every year. And I know it's worth more money now. You know, it— if I'd gotten a quote on it every day and somebody's said, "You know, maybe you oughta sell because there's, you know, there's clouds in the West," or something. (LAUGH) It's — it's crazy." - Warren Buffett

Charlie Munger: What Buying a House and Rabbit Hunting Have in Common
"Partly there was a time you felt foolish you didn't buy a house because you weren't making all the money everybody else was making, so it was a typical crazy boom. Now people have learned house prices can go down as well as up." - Charlie Munger

"It's like a fella who goes rabbit hunting and thoroughly enjoys himself. And then the rabbits haul out guns and start firing back. It would dim your enthusiasm for rabbit hunting, and that's what happened in the housing market." - Charlie Munger

More quotes in a follow up,

Adam

Quotes of 2012

Margin of Safety & Mr. Market's Mood

It was not difficult at all to buy stocks cheap (some higher quality, some less so) not too long ago when the Mr. Market's mood was more nervous and, at times, even extremely fearful. Well, in the context of the current environment, consider the following quotes by Ben Graham, Warren Buffett, Charlie Munger, Seth Klarman, and Peter Lynch:

"...the risk of paying too high a price for good-quality stocks—while a real one—is not the chief hazard confronting the average buyer of securities. Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions. The purchasers view the current good earnings as equivalent to 'earning power' and assume that prosperity is synonymous with safety." - Benjamin Graham in Chapter 20 of his book The Intelligent Investor

"The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money." - Warren Buffett in the 2000 Berkshire Hathaway Shareholder Letter

"...investors seek a margin of safety, allowing room for imprecision, bad luck, or analytical error in order to avoid sizable losses over time. A margin of safety is necessary because valuation is an imprecise art, the future is unpredictable, and investors are human and do make mistakes. It is adherence to the concept of a margin of safety that best distinguishes value investors from all others..." - Seth Klarman in his book Margin of Safety

"The idea of a margin of safety, a [Ben] Graham precept, will never be obsolete. The idea of making the market your servant will never be obsolete. The idea of being objective and dispassionate will never be obsolete. So Graham had a lot of wonderful ideas." - Charlie Munger at the 2003 Wesco Annual Meeting

"When the neighbors tell me what to buy, and then I wish I had taken their advice, it's a sure sign that the market has reached a top and is due for a tumble." - Peter Lynch on the fourth and last stage of his "cocktail party" theory*

Three or four years ago the higher quality businesses -- those that tend to have the most durable core economics -- became not at all expensive. Still, they did not drop nearly as much as the lower quality variety during the financial crisis. Buying the lower quality stuff at the height of the crisis may have worked out very well but many of them carried greater risk of permanent capital loss. In other words, after the fact it is easy to see it worked out okay, but the risks of capital loss was very real if the crisis had become even worse.

"Our approach is very much profiting from lack of change rather than from change. With Wrigley chewing gum, it's the lack of change that appeals to me. I don't think it is going to be hurt by the Internet. That's the kind of business I like." - Warren Buffett in this Businessweek article

Three or four years ago, nice discounts weren't hard to find for the best businesses -- those that Buffett describes as "profiting from lack of change" -- even if some of the lower quality businesses turned out to offer, in some cases, the possibility for huge gains (and, in some cases, maybe big losses).

Well, the situation is now a very different one.

These days, shares of high quality businesses are becoming increasingly difficult to buy with sufficient margin of safety. That, of course, doesn't necessarily mean we're anywhere near the "stage four" that Peter Lynch describes above. It doesn't mean the market won't continue going up. It's just that even the best need to be bought in a way that accounts for the fact that, as Klarman says:

"...valuation is an imprecise art, the future is unpredictable, and investors are human and do make mistakes."

Rising prices can start drawing investors in because it feels safer. Yet bargains often become increasingly difficult to come by when the market mood improves. There's a greater likelihood of permanent capital loss when increasingly high prices are paid. My primary interest lies in estimating value as well as is possible within my own limitations -- which as Klarman points out is necessarily imprecise -- then only putting capital at risk only when something I understand can be bought with a significant margin of safety.**

That makes the current investing environment increasingly a challenge.

Even if it happens to feel safer, investing, by definition, becomes more difficult and risks are increased as prices climb. If prices happen to go higher from here it's worth remembering the last sentence in the first of the two above quotes by Warren Buffett:

"Nothing sedates rationality like large doses of effortless money." 

Now, this doesn't mean I'd sell shares of an attractive business, bought at a great price, just because market prices begin to fully reflect intrinsic value. That's a recipe for unnecessary mistakes and frictional costs. There's only so many businesses that most investors can understand sufficiently well. Jumping out of something well understood (and bought well) that is temporarily fully valued, or even slightly more than fully valued, but otherwise has attractive long run prospects is just inviting expensive mistakes.***

Once I own enough shares of a good business at a discount to value, then my preference is to just own it for a very long time. That means occasional continued ownership of a good business during periods when it is not particularly cheap (though per share intrinsic value should continue to increase, even if unevenly, over time). Some might attempt to jump out of the stock with the intent to somehow get back in at just the right time.

It's the illusion of control.

There's plenty of evidence to suggest this approach is mostly a good idea in theory only. I'll let others try to pull off that sort of thing.

Sometimes the tide is with you, sometimes it is not.

"Our system is to swim as competently as we can and sometimes the tide will be with us and sometimes it will be against us. But by and large we don't much bother with trying to predict the tides because we plan to play the game for a long time.

I recommend to all of you exactly the same attitude.

It's kind of a snare and a delusion to outguess macroeconomic cycles...very few people do it successfully and some of them do it by accident. When the game is that tough why not adopt the other system of swimming as competently as you can and figuring that over a long life you'll have your share of good tides and bad tides?" - Charlie Munger interview at the University of Michigan

Charlie Munger: Snare and a Delusion

Learning to judge price versus value effectively, and having the discipline to buy only when selling at a plain discount, seems far more doable (even if far from easy). Consistently make wise judgments on something as complex as macroeconomic cycles seems, at least to me, near impossible. The good news is investing well doesn't really require significant macroeconomic insights.

Adam

* From Lynch's book One Up On Wall Street.
** An investor should always come up with their own valuation/required margin of safety. In other words, never buy a marketable stock based upon what someone else thinks. What's one good reason for this among many? Well, without an in depth feel for what something is really worth, the conviction required for an investor to "hang tough" just won't be there when market price inevitably goes the wrong way. A temporarily reduced price is generally not a problem if intrinsic value has been judged well. It is a problem if the investor ends up selling low out of fear/lack of conviction. This, of course, requires an ability to value the shares of businesses consistently well and a real awareness of limitations. 

That's why I think that no investor should be buying a stock that someone else happens to like no matter how good the track record of that investor happens to be. What might make sense for one investor likely does not for another. 
*** Including, after taxation, the possibility of not being able to buy a piece of an attractive business cheap again for a very long time. There are times, of course, that selling makes lots of sense. Some examples of circumstances where selling becomes a logical consideration:
- If the economic moat of a business becomes materially damaged.
- If value was judged poorly in the first place (error of commission).
- If an investment becomes plainly very expensive (not just somewhat).
- If a position has become an uncomfortably large part of the portfolio.
- If the opportunity costs of continued ownership are very high.

Quotes of 2012

A collection of quotes from 2012. All were said or written at some point during this calendar year.

Bogle on Speculation
"The thing that has always bothered me about gold is it has no value-creating unit. Underlying common stocks are earnings and dividends. Underlying bond returns are interest coupons. Underlying gold returns are nothing. There's nothing -- there's no there there. So it's a complete speculation on price." - John Bogle

Buffett: The Long Run Trumps Quick Returns
"If somebody bought Berkshire Hathaway in 1965 and they held it, they made a great investment — and their broker would have starved to death." - Warren Buffett

John Bogle: The Clash of the Cultures
"The issue that concerns me is, simply put, today's ascendance of speculation over investment in our financial markets; or, if you will, the ascen­dance of the culture of science -- of instant measurement and quantification -- over the culture of the humanities of steady reason and rationality." - John Bogle

Tom Russo: First Mover Advantage and the "Capacity to Suffer"
"The three prongs that I look for when investing in a business are: the fifty cent dollar bill, the capacity to reinvest in great brands and the 'capacity to suffer.' The 'capacity to suffer' is key because often the initial spending to build on these great brands in new markets has no initial return." - Tom Russo

Charlie Munger On "Rapid Trading By The Computer Geniuses"
"...take the rapid trading by the computer geniuses with the computer algorithms. Those people have all the social utility of a bunch of rats admitted to a granary. I never would have allowed the rats to get in the granary. I don't want the brilliant young men of America doting their lives at being rats in somebody else's granary. That's not my idea of the right way to run the republic. And if you let me write the laws, it wouldn't happen. But of course, nobody's going to do that." - Charlie Munger

Buffett & Munger on Gold
"...I think civilized people don't buy gold, they invest in productive businesses." - Charlie Munger

Assured Mediocrity
"...if you have patience, a decent pain threshold, an ability to withstand herd mentality, perhaps one credit of college level math, and a reputation for common sense, then go for it. In my opinion, you hold enough cards and will beat most professionals (which is sadly, but realistically, a relatively modest hurdle) and may even do very well indeed." - Jeremy Grantham

Why Buffett Wants IBM's Shares "To Languish"
"If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day's supply.

Charlie and I don't expect to win many of you over to our way of thinking – we've observed enough human behavior to know the futility of that – but we do want you to be aware of our personal calculus." - Warren Buffett

Buffett on Productive Assets Like Businesses, Farms, & Real Estate
"Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See's peanut brittle." - Warren Buffett

"Berkshire's goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety -- but we will also be owners by way of holding sizable amounts of marketable stocks. I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three* we've examined. More important, it will be by far the safest." - Warren Buffett

Happy New Year,

Adam

* The three are currency-based investments (i.e. money-market funds, bonds, mortgages, deposits etc.), nonproductive assets (i.e. gold), and productive assets (i.e. businesses or shares of businesses, farms, and real estate).

Quotes of 2011

Quotes of 2011

A collection of quotes from 2011. All were said or written at some point during this calendar year.

Amazon's Jeff Bezos on Inventing & Disrupting
"Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue. At Amazon we like things to work in five to seven years. We're willing to plant seeds, let them grow—and we're very stubborn. We say we're stubborn on vision and flexible on details." - Jeff Bezos

The Bond Market Rules
"Unrecognized as saviors, the bond vigilantes are demanding the keys to the Eternal City. If the Italian people are very lucky and very wise, they will allow themselves to be ruled by the bond market." - Thomas Donlan

PIMCO's Bill Gross
"Wall Street sort of lost its way, in that investment banking became a function not of allocating capital properly, but levering capital and levering the returns on capital as opposed to transferring capital to productive industries." - Bill Gross

Bogle Back to the Basics - Speculation Dwarfing Investment
"...our financial system has directed around $200 billion a year into initial public offerings and additional new public offerings and then additional offerings of company stock--$200 billion. We trade $40 trillion worth of stocks a year. So, that's 200 times as much speculation as there is investment. One only has to understand that all this trading back and forth, by definition, doesn't enrich the investor, because if I buy, you sell and vice versa, but what it does is enrich the croupier in the middle, which we call Wall Street..." - John Bogle

Final Wesco Meeting: More From Charlie Munger
"I like people admitting they were complete stupid horses' asses. I know I'll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn." - Charlie Munger

Warren Buffett on the 'New Normal' & 'Black Swans'
"I think the luckiest person around is the baby that's born in the United States today. I don't think there's any question about it. I mean...that person is going, on average, to enjoy a far better life, you know, than John D. Rockefeller had many years ago or that I have now....and so I think if there's a new normal, it will be a higher normal in terms of the average person of how they lived 20 years from now and 50 years from now." - Warren Buffett

"...we will have black swans, but we'll overcome black swans." - Warren Buffett

Final Wesco Meeting: A Morning With Charlie Munger
"Clever derivatives broke dozens of companies. It killed them. Bankrupt. We don't need these kinds of innovation in finance. It's OK to be boring in finance. What we want is innovation in widgets." - Charlie Munger

"When we bought See's Candies, we didn't know the power of a good brand. Over time we just discovered that we could raise prices 10% a year and no one cared. Learning that changed Berkshire. It was really important." - Charlie Munger

Munger on the Financial Sector
"Why should an investment banker go to Greece to teach them how to pretend their finances are different from what they really are? Why isn't that a perfectly disgusting bit of human behavior?" - Charlie Munger

Klarman: Trophy Properties vs Fixer-Uppers
"Price is perhaps the single most important criterion in sound investment decision making. Every security or asset is a 'buy' at one price, a 'hold' at a higher price, and a 'sell' at some still higher price. Yet most investors in all asset classes love simplicity, rosy outlooks and the prospect of smooth sailing. They prefer what is performing well to what has recently lagged, often regardless of price. They prefer full buildings and trophy properties to fixer-uppers that need to be filled, even though empty or unloved buildings may be the far more compelling, and even safer, investments." - Seth Klarman

Barron's Interview: Donald Yacktman
"I have to go back a minimum of 18 years to find blue-chip or high-quality companies selling at these kinds of prices relative to other things out there. It is a very unique period." - Donald Yacktman

2010 Berkshire Shareholder Letter: $ 66 Billion in Cost-Free Deposits
"At Berkshire, we have now operated at an underwriting profit for eight consecutive years, our total underwriting gain for the period having been $17 billion. I believe it likely that we will continue to underwrite profitably in most – though certainly not all – future years. If we accomplish that, our float will be better than cost-free. We will benefit just as we would if some party deposited $66 billion with us, paid us a fee for holding its money and then let us invest its funds for our own benefit." - Warren Buffett

Buffett: Six-fold Increase in Living Standards
"Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk of "great uncertainty." But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001. No matter how serene today may be, tomorrow is always uncertain.

Don't let that reality spook you. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective. 

We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America's best days lie ahead." - Warren Buffett

Happy New Year,

Adam

Quotes of 2010