Although the fundamentals of the market regularly change, many of Warren Buffett’s sayings are relatively timeless.
Buffett has been a market participant for a long time, and judging by his returns over the years, he’s been very successful at it too.
Buy quality companies at a fair price
I think one of the most useful Buffett quotes is: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
It’s always tempting to buy shares that look cheap. If a share price has fallen a lot, it can look like an opportunity. Shares that trade at low price-to-earnings ratios versus their peers also look like they have a lot of potential.
Yet a share’s cheapness can often be a mirage. If a share is cheap, it is often cheap for a reason. A share’s price could reflect potential deterioration in fundamentals in the future. Many cheap stocks often stay cheap for a long time, while many quality stocks that trade at higher valuations perform better.
In the last 10 years, Alphabet and Facebook have been great examples of how shares in quality companies that trade at a fair valuation have done well. Both companies have competitive advantages such as network effects, huge user bases, and many financial resources. Both have great management and are in growing sectors. Although both shares have traded at higher than average P/E ratios in many cases, both have done really well.
In terms of technology, Buffett himself purchased shares of Apple for his firm Berkshire Hathaway, and the bet turned out to be a great one. Apple is a quality company because it has a great brand, massive scale, and great financial resources. Buffett’s purchase of Apple shares has made Berkshire Hathaway tens of billions of dollars.
I believe another useful addition to the ‘buy a wonderful company at a fair price’ philosophy is also to be adequately diversified with a basket of quality companies in different sectors.
Think and invest with a long-term perspective
Another useful Buffett phrase in my view is, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”.
My interpretation of Buffett’s quote is to think and invest with a long-term perspective and not care that much about the short term.
Given a long enough period, many companies will have bad earnings reports. Many of the same companies will also have good earnings reports. The effects of many events will be canceled out by the effects of other events. That makes the impact of many events in the long term relatively minimal.
In my view, in the long term, how well stocks do depends a lot more on how they are positioned on long-term trends and how well management executes.
Buffett means what he says. He doesn’t often go in and out of positions in a short amount of time. Many of his firm’s investments are also positioned on long-term trends and have good management. Buffett’s decision to invest in Coca-Cola, for example, benefits from the long-term trend of rising incomes in emerging markets.
