Warren Buffett In His Own Words, Plus Some Other Timeless Quotes

I first wrote this article in 2007. By page views, it is the most popular article I have ever published, having been read by more than 15,000 people.

The original article contained 23 timeless quotes by Warren Buffett. In this re-write, I have removed a couple of the originals and replaced them with others that I like better. I have also included a few other great quotes from such sages as Yogi Berra and Woody Allen. Not all of them were about investing, but all can be applied to investing.

Warren Buffett’s best sound bites of all time on being a sensible investor.

1. Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.

2. Investing is laying out money now to get more money back in the future.

3. Never invest in a business you cannot understand.

4. I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.

5. I put heavy weight on certainty. It's not risky to buy securities at a fraction of what they're worth.

6. If a business does well, the stock eventually follows.

7. It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

8. Time is the friend of the wonderful company, the enemy of the mediocre.

9. For some reason people take their cues from price action rather than from values. Price is what you pay. Value is what you get.

10. Risk comes from not knowing what you're doing.

11. It is better to be approximately right than precisely wrong.

12. You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing.

13. What we learn from history is that people don’t learn from history.

14. You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.

15. You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.

16. You should invest in a business that even a fool can run, because someday a fool will.

17. When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.

18. 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.

19. Diversification may preserve wealth, but concentration builds wealth.

20. Someone’s sitting in the shade today because someone planted a tree a long time ago.

21. Many in Wall Street—a community in which quality control is not prized—will sell investors anything they will buy.

22. There seems to be some perverse human characteristic that likes to make easy things difficult.

23. Our favorite holding period is forever.

And here are the quotes from a few others:

1. Hindsight is much more precise than foresight but not as valuable. (Dwight D. Eisenhower)

2. If you don’t know where you’re going, you’ll end up somewhere else. (Yogi Berra)

3. It ain't over 'til it's over. (Yogi Berra).

4. Promise me you'll always remember: You're braver than you believe, and stronger than you seem, and smarter than you think. (Christopher Robin to Pooh, written by A. A. Milne)

5. A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. (Winston Churchill)

6. Investing is easy. Buy stocks that go up. If they don't go up, don't buy them. (Will Rodgers)

7. Eighty percent of success is showing up. (Woody Allen).

8. The race is not always to the swift, nor the battle to the strong—but that's the way to bet. (Damon Runyan).

Timing Outlook Remains Positive at 9.5

1. Summary

Since the last report 2½ weeks ago, the market has just gone pretty steadily up, making gains in 11 of the past 12 days through Wednesday. The Timing Outlook remains elevated at 9.5. As last time, the only indicator that is neutral instead of positive is Morningstar’s Market Valuation Graph, which at 1.05 suggests that the market is 5% overvalued right now. Every other indicator is positive.

The steady trickle of up-days raised the percentage of up-days such that my additional criteria for buying into the market were satisfied. Thus I am now 100% invested in my Capital Gains Portfolio, which requires 2/3 up days—along with the positive Timing Outlook—to make an investment.

As stated last time, the Capital Gains Portfolio’s investments simply are in the S&P 500-tracking SPY ETF. Most of my time recently has been devoted to working on THE TOP 40 DIVIDEND STOCKS FOR 2011, so I have not had time to evaluate individual stocks for the Capital Gains Portfolio. The SPY shares are protected by a tight 5.5% trailing sell-stop. My confidence in the rally has improved a little, for two reasons. First, I like slow, steady trends. Second, the tone of the “net news flow” seems to have changed from generally downbeat to somewhat positive. That’s my subjective judgment, anyway.

I hope everyone has a great Christmas, New Year, and/or whatever else you celebrate at this time of year. When the year has ended, the market will probably have gone up >10-11% for the year in price, plus another couple percent for dividend investors. That makes it a pretty good year in my book.

2. Market Performance Since Last Outlook
(“now” figures are as of close Wednesday, December 22, 2010)

Last Outlook (12/4/10): 9.5 (positive)

S&P 500 last time (12/4/10): 1225
S&P 500 now: 1259 Change: +3%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1259 Change in 2010: +13%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1259 Change since 3/9/09: +86% (in about 22 months)

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: December’s report, out last Friday, showed another increase, the fifth in a row. That keeps this indicator positive. +10

• Fed Funds Rate: No change. The Fed is clearly committed to a loose money policy until the economy is well into recovery or they become concerned with inflation. Positive. +10

• S&P 500 Market Valuation (P/E): Morningstar pegs the current P/E of the S&P 500 at 14.7, same as last time. This is well within positive territory (any value below 17.4). +10

• Morningstar’s Market Valuation Graph. Morningstar’s proprietary market valuation graph is at 1.05, up from 1.03 last time, suggesting that the market is 5% overvalued right now. This is still well within my 10% range of 1.00 for calling this indicator neutral. I like this indicator a lot, because of the unique and sensible way they construct it. You can see it by clicking here. Use the tabs across the top to see different timeframes and types of stocks. +5

• S&P 500 Short Term Technical Trend: This short-term technical indicator uses the two shorter (20-day and 50-day) simple moving averages (SMAs) of the S&P 500. The current configuration is the best you can get: Index > 20-day > 50-day. +10

• S&P 500 Medium Term Technical Trend: This medium-term technical indicator uses the two longer SMAs (50-day and 200-day). Right now it tells the same story: Index > 50-day >200-day. Positive. +10

• DJIA Short Term Technical Trend: Same story as the S&P 500 short-term trend. Positive. +10

• DJIA Medium Term Technical Trend: Same story. Positive. +10

• NASDAQ Short Term Technical Trend: Same story. Positive. +10

• NASDAQ Medium Term Technical Trend: Same story. +10

TOTAL POINTS: 95
NEW READING: 95 / 10 = 9.5 = POSITIVE

Interview with author David P. Van Knapp

A promotional video for my first book, SENSIBLE STOCK INVESTING: How to Pick, Value, and Manage Stocks, has just been completed. We shot 90 minutes of tape to get the raw material for this 1:44 video. I'm not quite as dynamic as the Sham Wow guy, or Cramer, but that's why I called the book "Sensible."

"THE TOP 40 DIVIDEND STOCKS FOR 2011" Nearing Its Final Stages

In earlier posts, I described the various stages and processes that I use to produce THE TOP 40 DIVIDEND STOCKS series. Here is where things stand for the 2011 edition.:

• I have passed all of the 136 survivors of Stage 1 testing through Stage 2. In that second stage, all of the stocks were again subjected to the six fundamental Stage 1 tests, but this time with no "easing" of the requirements. In addition, I applied several additional tests designed to anticipate how the stocks were likely to score when I applied my Easy-Rate standards to them. As I have stated, I love to eliminate stocks--it's like eliminating the non-contenders in a horse race. After you do it, you have the pleasure of knowing that you are looking at the likely winners of the race. This year's Stage 2 phase dropped the 136 survivors of Stage 1 all the way down to 46 "Semi-Finalists." The 90 stocks that didn't make it were removed to a "2012 Contenders" document, where they joined the stocks that were eliminated in Stage 1. I will maintain that document throughout next year, as it will become the pool of candidates a year from now (along with all the survivors) for 2012.
• Stage 3 consists of preparing the "Company Quality" portion of the Easy-Rate scoresheets for all of the survivors. Thus I write (or re-write) their Stories; study their EPS growth rates, ROEs, debt ratios, and other financial factors; and rate their dividend prowess (current yield, years increased, average rate of increase, and the like). The result is a Company Quality score using a system that has been optimized for dividend-growth stocks. (I tinker a little with the system each year based on new learnings and insights.) As I complete the analysis of each stock, I place it in a table in order of its Company Quality score. I also record the stock's current yield, as that may be used as a tie-breaker in selecting the Top 40.
• I have just about completed Stage 3. When I finish,  I will have ranked the 46 Semi-Finalists by Company Quality. That list will then be frozen until the first of the year. (If you saw the weather up here in Webster, NY, you might think I mean "frozen" literally.) In a first for us, my wife and I are driving to Florida on January 2-4. By the time we arrive, full-year 2010 data should be available. At that time, I will value the stocks using my Easy-Rate stock valuation system and update the Company Quality scores. That will give me all the information I need to pick the Top 40. If there are any ties, I'll select the stock with the higher yield--all other factors equal, higher yield is better.
• I will also go through the text at least one more time. I will have full-year 2010 statistics about dividends generally and also be able to complete the table showing how 2010's picks did for the full year. As I said in an earlier post, I am adding a new chapter this year on Retirement Financing, and I want to go over that again. This is the time to catch errors, from important logical mistakes down to little spelling errors.

Once those operations are complete, I can assemble the book. The Top 40 Easy-Rate sheets will have been completed and can be moved right into the final manuscript document. Certain mechanical operations must be performed, including converting the manuscript into a PDF document, "loading" the document to Payloadz (the company that I use for secure distribution), removing the 2010 edition from Payloadz, and setting up PayPal to accept credit/debit card payments for the new edition. Both my wife and I will go through the ordering process ourselves to make sure that it works and is intuitive. Then it will be ready for launch, hopefully some time around January 15-20.

Interesting tidbits: 32 of the 46 Semi-Finalists have been a Top 40 pick in 2008, 2009, and/or 2010. That is not a surprise: It takes a special kind of company, with lots of great characteristics, to survive this kind of analysis. Certain companies have been on that plateau for years and are simply excellent companies that  many would call Blue Chips. But some of the other Semi-Finalists are relatively new to the dividend-raising world (I require at least 5 consecutive years of increases to be eligible at all). Maybe they are the Blue Chips of the future and now is the time to get in on the ground floor. The Semi-Finalists represent all manner of size and many industries. Most but not all are domiciled in the USA. Even if domiciled in the USA, most get close to or more than half their revenues from outside the country. When you go through an exercise like this, the ongoing globalizaton of companies and markets just jumps out at you. My take: You do not have to invest in foreign companies to gain access to many of the opportunities represented by global markets and developing economies. These companies are already doing it.

September-October-November Rally Continues Into December; Timing Outlook Positive at 9.5

1. Summary

The chart tells the story. (Click on the chart to enlarge it.) The market has been generally rising since the beginning of September. This is reflected in the high reading for the Timing Outlook, currently 9.5, up from 9.0 last time. The only indicator that is neutral instead of positive is the Morningstar Market Valuation Graph, which clocks in at 1.03, suggesting that the market is 3% overvalued right now. Every other indicator is positive.

The strange thing about this rally is that there have been quite a few down days (shown in the red candlesticks and in the red volume bars at the bottom of the chart). They have been more than offset by occasional large one-day lifts. This characteristic has kept me from becoming fully invested in my Capital Gains Portfolio, which requires 2/3 up days—along with the positive Timing Outlook—to make an investment. The proliferation of small down days has kept the portfolio from fully participating in the 3-month rally. I check approximately every week, and if the conditions are right, I invest 10% more cash. The portfolio is about 70% invested (30% cash) at this time.

While the slowed pace of re-investing costs me some gains when the market rises as unevenly as it has, I nevertheless continue to follow the 2/3 rule. It provides a margin of safety and conservatism that has served me well over the long term. It does guarantee that I will miss the beginning couple weeks of any rally.

As stated last time, The Capital Gains Portfolio’s only investments currently are in the S&P 500-tracking SPY ETF. Most of my time in the last three months has been devoted to preparing 2011’s edition of THE TOP 40 DIVIDEND STOCKS, so I do not have up-to-date Easy-Rate™ sheets for individual capital-gains stocks. SPY allows me to participate in the market rally without having currently rated individual stocks.

The SPY shares are protected by a tight 5% trailing sell-stop. This has not been a high-confidence rally for me. The uneven nature of the market’s rise shows that it is prone to react quickly to negative news on any particular day. That suggests to me that lots of investors have their fingers on the Sell button. Friday’s increase in the unemployment rate to 9.8% from 9.6% certainly did not increase confidence in the recovery. Despite that, interestingly, the market went up Friday. Those who believe that the market is always rational need not apply. I think that it is rational in the long term, but is unpredictable—nearly random—in the very short term of a few days.

As mentioned last time, I have re-named my Dividend Growth Portfolio to emphasize its focus on rising-dividend stocks. That portfolio remains 100% invested, as it usually is. Because the focus there is on continually increasing the dividend stream, I don’t use sell-stops or go to cash when the market plunges. The only cash is accumulated dividends waiting to be reinvested when the total hits $1000. As stated earlier, I am deep into preparation of THE TOP 40 DIVIDEND STOCKS FOR 2011. I will keep you up to date on its progress. I hope to release it in January, and I am still on schedule to do that.

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday, December 4, 2010)

Last Outlook (11/12/10): 9.0 (positive)
S&P 500 last time (11/12/10): 1199
S&P 500 now: 1225 Change: +2%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1225 Change in 2010: +10%

S&P 500 at close 3/9/09 (beginning of bull market): 677
S&P 500 now: 1225 Change since 3/9/09: +81% (in about 21 months)

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: The most recent report in November showed an increase in this index, the fourth in a row. That keeps this indicator positive. +10

• Fed Funds Rate: No change. The Fed seems committed to a loose money policy until the economy is well into recovery or they become concerned with inflation. Positive. +10

• S&P 500 Market Valuation (P/E): Morningstar pegs the current P/E of the S&P 500 at 14.7, down slightly from 15.1 last time. This is still well within positive territory at any value below 17.4, suggesting that the market is undervalued. +10

• Morningstar’s Market Valuation Graph. Morningstar’s proprietary market valuation graph is at 1.03, up from 1.01 last time, suggesting that the market is 3% overvalued right now. This is well within my +/- 10% range for calling this indicator neutral. As you can see, this indicator's suggestion is different from the suggestion of the market's P/E just stated. +5

• S&P 500 Short Term Technical Trend: This short-term technical indicator uses the two shorter simple moving averages (SMAs) of the S&P 500. The configuration has become even more positive than last time, as the Index > 20-day > 50-day picture has become more pronounced. +10

• S&P 500 Medium Term Technical Trend: This tells the same story: Index > 50-day >200-day. The index is up about 4% since the “golden cross” (the upward passage of the blue 50-day SMA through the red 200-day SMA) on October 22, visible in the middle of the chart. Positive. +10

• DJIA Short Term Technical Trend: Same story as the S&P 500 short-term trend. Positive. +10

• DJIA Medium Term Technical Trend: Same story. Positive. +10

• NASDAQ Short Term Technical Trend: Same story. Positive. +10

• NASDAQ Medium Term Technical Trend: Same story. +10

TOTAL POINTS: 95
NEW READING: 95 / 10 = 9.5 = POSITIVE