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10 Pieces Of Investing Wisdom From Warren Buffett

30 April 2016 will be a special day this year for many die-hard investors around the world – that’s the day when the legendary Warren Buffett would hold his upcoming Berkshire Hathaway annual shareholder’s meeting.

Given that the event is just 10 days away, I thought it’d be a great time now to look back over Buffet’s long and storied career and pick out 10 of some of my favourite quotes from him. Here they are, along with my comments.

On spotting a great business:

“The single-most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you’ve got a terrible business. I’ve been in both, and I know the difference.”

When a company has pricing power, it can easily raise its prices to deal with escalation in costs, thereby protecting its profit. For a company that has no pricing power, it will find it tough to pass on any costs increases, thereby placing its profit at risk.

On the importance of temperament in investing:

“We bought all of our WPC holdings in mid-1973 at a price of not more than one-fourth of the then per-share business value of the enterprise. Calculating the price/value ratio required no unusual insights. Most security analysts, media brokers, and media executives would have estimated WPC’s intrinsic business value at $400 to $500 million just as we did. And its $100 million stock market valuation was published daily for all to see.

Our advantage, rather, was attitude: we had learned from Ben Graham that the key to successful investing was the purchase of shares in good businesses when market prices were at a large discount from underlying business values.”

Stocks can fall to irrational lows from time to time. But, not every investor has the mental fortitude or knowledge needed to buy during those occasions.

On why investors should love falling stock prices:

“We ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term. In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price.”

If a company’s business grows over time but its stock stays flat or even falls, then an investor is able to obtain a price-to-value relationship that is steadily improving. That’s a great thing to have.

On the importance of sticking with great businesses:

“Our conclusion is that, with few exceptions, when a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.”

Buffett’s view here is that businesses with poor economic characteristics are hard to improve upon, no matter how talented a business manager someone may be.

On horrible businesses:

“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favour by shooting Orville down.”

For the sake of argument, let’s look at two companies: Vicom Limited (SGX: V01) and Singapore Airlines Ltd (SGX: C6L). The former is in the business of providing inspection and testing services to vehicles and many other types of companies. Meanwhile, the latter is an airline.

The average ratio of Vicom’s annual capital expenditure to its annual revenue over its last 10 completed fiscal years is 7.1%. Meanwhile, the self-same ratio for Singapore Airlines is 14.3%. This is an example of how Singapore Airlines is more capital intensive than Vicom.

In the same decade as above, Vicom’s earnings per share had grown by a total of 241% whereas Singapore Airlines had seen its earnings per share decline by 71%.

Given these numbers, it’s perhaps no surprise to find that Vicom’s shares have delivered a long-term total return (inclusive of gains from reinvested dividends) that has absolutely trounced that of Singapore Airlines. To the point, Vicom’s total return since the start of 2005 is 1,128%; Singapore Airlines’ is just a measly 80%.

On avoiding turnarounds:

“Both our operating and investment experience cause us to conclude that ‘turnarounds’ seldom turn, and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price.”

This is Buffett trying to explain how “turnarounds seldom turn.” That’s good advice to keep in mind.

On the importance of going beyond the reported numbers:

“Managers and investors alike must understand that accounting numbers are the beginning, not the end, of business valuation.”

Accounting numbers can sometimes mask a company’s true economic characteristics. It’s up to us as investors to determine if a company’s reported figures are an accurate representation of reality.

On the dangers of acquisitions:

“Investors can always buy toads at the going price for toads. If investors instead bankroll princesses who wish to pay double for the right to kiss a toad, those kisses had better pack some real dynamite.

We’ve observed many kisses but very few miracles. Nevertheless, many managerial princesses remain serenely confident about the future potency of their kisses – even after their corporate backyards are knee-deep in unresponsive toads.”

It can be tough for a company to integrate an acquisition and Buffett’s words are a good reminder of the case.

On the dangers of overpaying for an investment:

“The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do. For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.”

Even the best businesses can be a lousy investment if bought at the wrong price. For instance, WalMart’s shares were priced at nearly 60 times the company’s profit at the start of 2000. My colleague Morgan Housel wrote last week that “WalMart net income has tripled since 2000. Its stock has lost 1.5% since 2000.” That’s the price investors pay for a cheery consensus.

On the type of businesses that win:

“Experience indicates that the best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago.”

In today’s era where the rate of change in live and business appears to be increasing, it’s worth remembering that companies that make products or provide services that don’t change may be great winners too.

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Editor's note: A 10th quote has been added. It was mistakenly removed in the initial version of this article.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Berkshire Hathaway and Vicom.