Widely followed billionaire investor Warren Buffett recently released his latest letter to Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) shareholders, and as usual, it was full of useful investing information. Since Buffett is one of the most often-quoted people in the world, here are five new Buffett-isms we can add to the list, and what they mean to you as an investor.
1. "Widespread fear is your friend as an investor, because it serves up bargain purchases."
Here's something you may not know. Successful long-term investors love stock market corrections, and even crashes. When everyone else is selling, it creates great opportunities for investors with the foresight to see past the short-term volatility.
Image source: The Motley Fool.
Here's an example from Buffett's own past. In 2008 while the financial world was in free-fall, Buffett invested $5 billion of Berkshire Hathaway's capital in Goldman Sachs (GS +0.11%), for which he received 10%-yielding preferred stock as well as warrants to buy common shares at a strike price of $115. He still holds shares of Goldman that resulted from the deal, which are currently worth about $250 each.
The point is that when most of the financial world is in a panic, the ability to keep a cool head and think from a long-term perspective can allow you to make tremendous profits over time.
2. "Personal fear is your enemy."
According to a study by Dalbar, the stock market generated an annualized average total return of 8.19% over the 20-year period from 1996-2015, but the average equity fund investor averaged just 2.11%. Why?
The reason for this massive underperformance is simple. It's common knowledge that the central idea of investing is to buy low and sell high, but too many people do the exact opposite. When stocks keep going up and up, and they see how much money everyone else is making, that's when many people decide to buy. And, when the market is crashing, panic sets in and people sell to limit their losses. In other words, in practice, investors have an unfortunate tendency to buy high and sell low. Don't let your own emotions lead to poor investment decisions.
3. "What is smart at one price is stupid at another."
Buffett used this quote in his letter in reference to share repurchases, and how they make great financial sense when shares are trading at a discount to their intrinsic value, but are a silly use of capital when shares are expensive.
However, this quote applies to any investment. No matter how great a company's business is, and how much money it could make, there is a price above which it becomes a bad investment. While methods of analyzing stocks vary from person to person, the lesson to be learned is to thoroughly evaluate the stocks you buy, and if the price isn't reasonable, walk away -- no matter how much you want to own the stock.
4. "We have made no commitment that Berkshire will hold any of its marketable securities forever."
One of the most famous Warren Buffett quotes among long-term investors is "our favorite holding period is forever." Unfortunately, many people misinterpret this quote to mean that Berkshire will hold the stocks in its portfolio forever.
In this year's letter to shareholders, Buffett wanted to clarify what he meant.
What Buffett means is that Berkshire buys stocks with the intention of holding them forever, if the original thesis for buying them continues to apply. If his original reasons for buying a stock no longer apply, Buffett is perfectly willing to sell. As an example, Buffett made a rather large investment in Freddie Mac stock in the 1990s. However, he noticed that management was slowly starting to take on more and more risk to boost earnings, and Buffett wasn't comfortable with the path the company was taking. So, he sold Berkshire's position in 2000 -- about eight years before the financial crisis proved his instincts right.
5. "When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients."
This one isn't hard to interpret. High investment fees are your enemy. Buffett used the example of hedge funds, which generally charge such exorbitant management fees that investors are lucky to make any money at all.
However, even if you don't invest in hedge funds, this logic also applies to actively managed mutual funds. Don't get me wrong, it's completely worth paying a reasonable management fee for a fund with a strong track record of performance. However, many funds haven't done any better than the S&P 500, but charge high expense ratios (I consider high to be anything over 1%).
To illustrate why this is such a big deal to Buffett, consider this example. If you had invested $10,000 in a low-cost S&P 500 index fund 35 years ago, your investment would be worth about $240,000 today. If you had invested the same amount in a fund that did just as well as the S&P 500, but charged a 1% expense ratio, your investment would have grown to $173,800. Still impressive, but that "small" 1% fee would have robbed more than $66,000 of your gains. Think about this next time you're comparing funds to invest in.
