Warren Buffett, the legendary investor, is one of the wealthiest people in the world. He has made most of his fortune from stock market investments. So, when Warren Buffett says anything about money, the world is all ears. Many of his quotes are quite popular in the investing community. We will list some of Warren Buffet's quotes and what we can learn from them.
Most Warren Buffett quotes have stood the test of time. Hence, investors can have a lot of learnings from them. Some of these include:
Quote 1: Our favourite holding period is forever
With this quote, Warren Buffett focuses on the importance of long-term investing. The power of compounding works in the long run. Historically, asset classes such as equities, gold, real estate, etc., gave good returns to investors when they held them for a long period.
In the short term, there can be volatility, and asset prices can move up and down. But, in the long term, with strong fundamentals, the asset price trend is usually on the higher side. Various studies conducted on the performance of Nifty 50 have shown that the longer you stay invested, the lower the chances of losing money and the higher the chances of making profits.
ALSO READ: Investing Lessons: Warren Buffett explains why should you stop looking at the ‘rear-view' mirror
Table: Rolling returns for Nifty 50
(Source: nseindia, as of 15th December 2021)
The above table shows the percentage of the time the Nifty 50 delivered negative or positive returns based on the investment time horizon on daily rolling return analysis. Check the column of negative returns. The returns were negative for a 1-year investment time horizon, 25.8% of the time. The negative returns start reducing as the investment time horizon increases (20% of the time for 2 years investment and 7.6% for 3 years investment).
When the investment time horizon increased to 5 years, only 0.1% of the time returns were negative. Finally, when the investment time horizon increases to 7 years and above, the returns are positive 100% of the time.
Also, as the investment time horizon increases, the returns CAGR increases. When the investment time horizon was 7 years, 40.3% of the time, the returns were in the 10-15% CAGR range, and 39.8% of the time, the returns were higher than 15% CAGR.
Similarly, when the investment time horizon was increased to 10 years, 32.1% of the time, the returns were in the 10-15% CAGR range, and 47.9% of the time, the returns were higher than 15% CAGR.
So, as Warren Buffett says, you should always invest for the long term to benefit from the magic of compounding and create wealth.
ALSO READ: Warren Buffett's investing mantras; 5 key points to remember
Quote 2: Never depend on a single income. Make an investment to create a second source
With this quote, Warren Buffett talks about the importance of having multiple sources of income rather than depending on a single income. We saw how at the start of the Covid pandemic, so many people lost their only source of income. Salaried people lost jobs; self-employed people had to halt their practice; business people had to shut their businesses, etc.
You can build multiple sources of income with your investments. For example, fixed deposits can give you monthly interest; real estate can provide you monthly rent; equity shares can give you regular dividends; side hustles or gigs can give you additional income. All these income sources can support your primary source of income. Over time, if you work on it diligently, the other sources of income build up, their share in the overall income increases, and someday can help you become financially independent.
Just like your investments, you should diversify your sources of income. The more sources of income that you can build, the better.
Quote 3: We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful
Warren Buffett considers stock market sell-off events like recession, war, pandemic, political instability, etc., one of the best times to buy shares of quality businesses. When the stock market falls, the shares of good-quality businesses also fall temporarily. Warren Buffet uses such opportunities to buy or top up the shares of good quality businesses on his buy list.
Most people usually do the opposite. They buy shares at high/expensive valuations when there is market euphoria. During such times the shares of many companies are trading at their 52-week highs, multi-year highs, or lifetime highs. And when the market turns and sells off, these people panic and sell shares at a loss. There is pessimism, and shares of many companies are trading at 52-week lows or distress sale valuations.
Warren Buffett advises people to take advantage of market dips to buy shares of their favourite companies that were always there on their buy list. He advises people to be greedy to buy during market falls when others are fearful and selling. At the same time, he advises people to be fearful of buying during market euphoria when others are greedy and buying.
You should not follow the trend or herd mentality during the market boom and bust periods. In fact, you should do the opposite, and the markets will suitably reward you in the long run.
ALSO READ: Warren Buffett’s 10 letters to shareholders: Key investing lessons of the decade
Quote 4: Price is what you pay. Value is what you get
With this quote, Warren Buffett emphasises value investing. He has always followed value investing, which he learnt from Benjamin Graham. As per the value investing philosophy, Warren Buffett invests in companies currently undervalued by the market, hoping that the value will be discovered in the future and the share price will increase.
Warren Buffett advises investors not to overpay for companies whose share prices are trading above their fair price. He advises investors to calculate the company's value and compare it with the market price. You can buy the shares if the market price is lower than the value. If the market price is higher than the value, wait for the price to fall until it reaches the value you have arrived at.
Quote 5: Risk comes from not knowing what you're doing
With this quote, Warren Buffett explains the importance of research before investing. He advises whichever financial product you plan to invest in, research it thoroughly. Before investing, understand the financial product features, return potential, risks involved, etc. The research part helps you know what you are doing, thereby reducing the risk.
Many people invest based on tips or recommendations from family, friends, colleagues, acquaintances, etc. Some of these investments can lead to losses if you have not done your homework correctly. Hence, either do research or take the guidance of a qualified and experienced financial advisor who keeps your interests above everything else.
Follow Warren Buffett’s footsteps to become a smart investor
The above are just five of Warren Buffett's well-known quotes and what we can learn from them. Many other quotes from the legendary investor can teach you valuable lessons. Many well-known investors, investment firms, etc., have framed their investment philosophy based on learnings from Warren Buffett. You should read his quotes, learn from them, and implement them to become a smart investor.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.