Mention the name “Warren Buffett” and people instantly recognise him as the most successful investor in the world. This, in addition to his folksy demeanour and amiable personality, endears him to legions of fans around the world.
Buffett is also well-known for his intelligent quotes – some are one-liners which pack a lot of meaning into just a few words. Let us look at four of these quotes and my interpretation of they mean for investors:
“You only know who’s been swimming naked when the tide goes out”
During good times, everyone performs well, and it’s tough, if not impossible, to know who is shouldering on more risk than he or she should comfortably take on. Many investors also borrow a lot to invest and perform very well when the markets and share prices are rising. Only when bad times arrive (“tide goes out”) can we see who has been reckless and imprudent, and thus will suffer badly as they did not undertake proper risk control (“swimming naked”).
“Don’t ask the barber if you need a haircut”
This relates to cases where an investor frequently asks his broker for advice on whether he should buy or sell shares in a particular company. Note that the broker makes money from clients through frequent transactions (known as “broker commissions”), and when asked such a question, he would feel compelled to answer in the affirmative as it enriches his own pocket. Hence, what Buffett means is that you cannot receive an objective answer if you ask someone a question in which the person has a vested interest in the situation. Another example of this is going to a restaurant and asking the waiter if their food tastes delicious.
“If you buy things you don’t need, you will soon sell things you need”
Buffett here is giving us a nugget of personal finance wisdom. If we use our money to buy luxury items or discretionary items (i.e. things we don’t need), we may get into deeper debt and end up having to sell things which are necessities to settle our debt. Remember to spend within your means and not to incur unnecessary consumer debt which carries very high interest rates.
“You pay a high price for a cheery consensus”
This is probably one of Buffett’s best-known quotes as it warns investors against over-paying for stocks with high valuations. “Cheery consensus” here refers to high levels of optimism and expectations which are priced into the stock, hence making it very risky to buy as the slightest hint of bad news would send the share price crashing. As investors, we should, therefore, seek a margin of safety in whatever we buy by making sure that valuations are fair or cheap in relation to the value that the company delivers.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.