Buffett Stock Market Quotes

Buy a stock the way you would buy a house. Understand and like it such that you’d be content to own it in the absence of any market.

The stock market is a device for transferring money from the impatient to the patient.

Here is an all-too-brief summary of Buffett’s approach: He looks for what he calls “franchise” companies with strong consumer brands, easily understandable businesses, robust financial health, and near-monopolies in their markets, like H & R Block, Gillette, and the Washington Post Co. Buffett likes to snap up a stock when a scandal, big loss, or other bad news passes over it like a storm cloud—as when he bought Coca-Cola soon after its disastrous rollout of “New Coke” and the market crash of 1987. He also wants to see managers who set and meet realistic goals; build their businesses from within rather than through acquisition; allocate capital wisely; and do not pay themselves hundred-million-dollar jackpots of stock options. Buffett insists on steady and sustainable growth in earnings, so the company will be worth more in the future than it is today.

Buffett has said that the stock market is designed to transfer money “from the active to the patient.

students need only two well-taught courses—How to Value a Business, and How to Think About Market Prices. Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards—so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value. Though it’s seldom recognized, this is the exact approach

There are certain things that cannot be adequately explained to a virgin either by words or pictures.

Stocks are the things to own over time. Productivity will increase and stocks will increase with it. There are only a few things you can do wrong. One is to buy or sell at the wrong time. Paying high fees is the other way to get killed. The best way to avoid both of these is to buy a low-cost index fund, and buy it over time. Be greedy when others are fearful, and fearful when others are greedy, but don’t think you can outsmart the market. “If a cross-section of American industry is going to do well over time, then why try to pick the little beauties and think you can do better? Very few people should be active investors.

On 3 timeless ideas for investing Benjamin Graham, three fundamentally basic ideas: 1. You should look at stocks as part of ownership of a business. 2. You should look at market fluctuations in terms of his "Mr. Market" example & make them your friend rather than your enemy by essentially profiting from folly rather participating in it, & finally, 3. The 3 most important words in investing are "margin of safety" - ...always building a 15,000 pound bridge if you're going to be driving 10,000 pound truck across it...

financial markets will become divorced from reality — you can count on that. More Jimmy Lings will appear. They will look and sound authoritative. The press will hang on their every word. Bankers will fight for their business. What they are saying will recently have “worked.” Their early followers will be feeling very clever. Our suggestion: Whatever their line, never forget that 2+2 will always equal 4. And when someone tells you how old-fashioned that math is ---zip up your wallet, take a vacation and come back in a few years to buy stocks at cheap prices.

One example of a high-tech company that submits to a Graham type of analysis is Amazon.com. Though it does business exclusively on the Web, Amazon is essentially a retailer, and it may be evaluated in the same way as Wal-Mart, Sears, and so forth. The question, as always, is, does the business provide an adequate margin of safety at a given market price. For much of Amazon’s short life, the stock was wildly overpriced. But when the dot-com bubble burst, its securities collapsed. Buffett himself bought Amazon’s deeply discounted bonds after the crash, when there was much fearful talk that Amazon was headed for bankruptcy. The bonds subsequently rose to par, and Buffett made a killing.

Basically, Graham breaks the art of investing down into two simple variables – price and value. Value is what a business is worth. Price is what you have to pay to get it. Given the stock market’s manic-depressive behavior, numerous occasions arise where a business’ market price is distinctly out of line with its true business value. In such instances, an investor may be able to purchase a dollar of value for just 50 cents. Note that there is no mention here of interest rates, economic forecasts, technical charts, market cycles, etc. The only issues are price and value. I should also note that Graham emphasizes a large margin of safety. The strategy is not to buy a dollar of value for 97 cents. Rather, the gap should be dramatic so as to absorb the effects of miscalculation and worse-than-average luck.

Highly profitable stocks only beat the market if Buffett’s moat protects the profits. Without the moat, highly profitable stocks will get beaten up by the competition. Mean reversion acts on profits to drag down winners and push up losers. Investors should use some common sense and natural skepticism about profit charts that march all the way to heaven.

But it is the long-term merits of the index fund—broad diversification, weightings paralleling those of the stocks that comprise the market, minimal portfolio turnover, and low cost—that commend it to wise investors. Consider these words from perhaps the wisest investor of all, Warren E. Buffett, from the 1996 Annual Report of Berkshire Hathaway Corporation: Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.

You can gain great insights about investing from a careful study of Buffett’s Generals. He was constantly appraising the value of as many stocks as he could find, looking for the ones where he felt he had a reasonable ability to understand the business and come up with an estimate for its worth. With a prodigious memory and many years of intense study, he built up an expansive memory bank full of these appraisals and opinions on a huge number of companies. Then, when Mr. Market offered one at a sufficiently attractive discount to its appraised value, he bought it; he often concentrated heavily in a handful of the most attractive ones. Good valuation work and proper temperament have always been the two keys pillars of his success as an investor. Buffett

The course of the stock market will determine, to a great degree, when we will be right, but the accuracy of our analysis of the company will largely determine whether we will be right. In other words, we tend to concentrate on what should happen, not when it should happen.”7 This

a declining Dow gives us our chance to shine and pile up the percentage advantages which, coupled with only an average performance during advancing markets, will give us quite satisfactory long-term results. Our target is an approximately ½% decline for each 1% decline in the Dow and if achieved, means we have a considerably more conservative vehicle for investment in stocks than practically any alternative.8 Buffett

But being short something where your loss is unlimited is quite different than being long something that you’ve already paid for. And it’s tempting. You see way more stocks that are dramatically overvalued in your career than you will see stocks that are dramatically undervalued. I mean there — it’s the nature of securities markets to occasionally promote various things to the sky, so that securities will frequently sell for 5 or 10 times what they’re worth, and they will very, very seldom sell for 20 percent or 10 percent of what they’re worth. So, therefore, you see these much greater discrepancies between price and value on the overvaluation side. So you might think it’s easier to make money on short selling. And all I can say is, it hasn’t been for me. I don’t think it’s been for Charlie. It is a very, very tough business because of the fact that you face unlimited losses, and because of the fact that people that have overvalued stocks — very overvalued stocks — are frequently on some scale between promoter and crook. And that’s why they get there. And once there — And they also know how to use that very valuation to bootstrap value into the business, because if you have a stock that’s selling at 100 that’s worth 10, obviously it’s to your interest to go out and issue a whole lot of shares. And if you do that, when you get all through, the value can be 50. In fact, there’s a lot of chain letter-type stock promotions that are sort of based on the implicit assumption that the management will keep doing that. And if they do it once and build it to 50 by issuing a lot of shares at 100 when it’s worth 10, now the value is 50 and people say, “Well, these guys are so good at that. Let’s pay 200 for it or 300,” and then they could do it again and so on. It’s not usually that — quite that clear in their minds. But that’s the basic principle underlying a lot of stock promotions. And if you get caught up in one of those that is successful, you know, you can run out of money before the promoter runs out of ideas. In the end, they almost always work. I mean, I would say that, of the things that we have felt like shorting over the years, the batting average is very high in terms of eventual — that they would work out very well eventually if you held them through. But it is very painful and it’s — in my experience, it was a whole lot easier to make money on the long side.

the difference between interest rates creates a disparity between price and value. This disparity is where an investor makes money—especially in the stock market

Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the “proof” delivered by the market, and the pool of buyers — for a time — expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: “What the wise man does in the beginning, the fool does in the end.

Successful long-term investors like Warren Buffett know that bear markets are buying opportunities.

it's rather interesting because one of the greatest economists of the world is a substantial shareholder in Berkshire Hathaway and has been from the very early days after Buffett was in control. His textbook always taught that the stock market was perfectly efficient and that nobody could beat it.But his own money went into Berkshire and made him wealthy. So, like Pascal in his famous wager, he hedged his bet.The iron rule of life is that only twenty percent of the people can be in the top fifth Is the stock market so efficient that people can't beat it? Well, the efficient market theory is obviously roughly right-meaning that markets are quite efficient and it's quite hard for anybody to beat the market by significant margins as a stock picker by just being intelligent and working in a disciplined way.Indeed, the average result has to be the average result. By definition, everybody can't beat the market.

Do not approach the market unless you are willing to think about stocks, first and always, as part-ownership interests in businesses. Be prepared to diligently study the businesses you own, as well as the companies you compete against, with the idea that no one will know more about your business than you do. Do not even start a focus portfolio unless you are willing to invest a minimum of five years (10 years would even be better). Never leverage your focus portfolio. An unleveraged focus portfolio will help you reach your goals fast enough. Remember, an unexpected margin call on our capital will likely wreck a well-tuned portfolio. Accept the need to acquire the right temperament and personality to become a focus investor.

In the conclusion to his letter to the Post’s owner, Buffett therefore laid out his recommendations: Either stay the course with a bunch of big, mainstream professional fund managers and accept that the newspaper’s pension fund would likely do slightly worse than the market; find smaller, specialized investment managers who were more likely to be able to beat the market; or simply build a broad, diversified portfolio of stocks that mirrored the entire market. Buffett obliquely noted that “several funds have been established fairly recently to duplicate the averages, quite explicitly embodying the principle that no management is cheaper, and slightly better than average paid management after transaction costs.

Buffett’s 1952 memo on Cleveland Worsted Mills mentioned that the stock traded below net current asset value and had “several well-equipped mills.”98 He thought the company had ample earnings to cover the dividend, a view supported by the summary financials found in Table 1. The company paid $8.00 a share out to shareholders, and the last year the company earned below this figure was 1945.99 The income and return on capital figures were a little concerning. Like Marshall-Wells in the first chapter, Cleveland Worsted Mills was coming off the post-World War II highs and falling back to earth, earning a respectable but not extraordinary return on invested capital in 1951. Worsted was a commodity product, with shortages the sole reason for the company’s previously rising income and returns on capital. As the market normalized, the company was unlikely to earn above-average returns on capital in the future.

Buffett’s thinking was simple: He bought the stock because it sold for less than its net cash. Union Street Railway was a tiny company, selling for a $643,000 market capitalization and an enterprise value of negative $327,000. Discussing his rationale, he said: It had a hundred sixteen buses and a little amusement park at one time. I started buying the stock because they had eight hundred thousand dollars in treasury bonds, a couple of hundred thousand in cash, and outstanding bus tickets of ninety-six thousand dollars. Call it a million dollars, about sixty bucks a share. When I started buying it, the stock was selling around thirty or thirty-five bucks a share.128

Greif had a quirk in its share structure that presented a valuation challenge. The company had two shares of stock, Class A and Class B, but only the A shares were publicly traded. The B shares were closely held and not exchange-traded. Like most companies with dual-class share structures, they had differing voting rights. Unlike most companies with dual-class share structures, the classes were entitled to differing dividend distributions and liquidation proceeds. The A shares—the class Buffett bought—had first rights to liquidation proceeds and dividends. Plus, the A shares were entitled to cumulative dividends while the B shares were not. The A shares would only gain voting rights if the company failed to pay the A’s entitled dividend for four quarters. However, the Class B shares received a higher split of additional dividends once the distribution exceeded a certain rate. This made calculating market capitalization figures difficult since there was no price readily available for the Class B shares.

Union Street Railway was a New Bedford, Massachusetts-based bus company. With the equity trading below the net cash on the company’s balance sheet, Union Street was a classic net-net when Buffett bought the stock. This was a small, thinly traded company with a market capitalization below $1 million. The small float meant acquiring stock required a bit of work and persistence by the young, enterprising investor. Like the other stocks discussed so far, it was cheap. But in contrast to the previous investments discussed in this book, this one was actually losing money at the time of Buffett’s purchase. Yet this stock would be a huge winner for Buffett, yielding him a dollar profit worth more than 4.5x the average household yearly income at the time. After accumulating a meaningful stake in the company, Buffett took a trip to Massachusetts to meet with the company’s president. While he did not run a proxy contest or take aggressive action to prompt a capital return, the company paid a substantial dividend shortly after his visit.109 Union Street Railway was an early lesson in how positive changes in capital allocation can lead to windfall profits.

The balance sheet told a different story. Selling for $13.38 per share at the end of 1954—an $18.8 million market capitalization—P&R traded close to its net current asset value of $9.16 per share, a figure that included significant excess inventory. While this alone was not enough to make the stock cheap, P&R also had an off-balance-sheet asset known as culm banks, a waste material accumulated from anthracite mining which was thought to have value as a fuel source. Buffett believed this asset could be worth around $8 per share.150 The net current asset value and the culm banks combined were worth $17 a share, enough to give Buffett confidence that the stock was cheap. But, as Table 2 shows, the company also had substantial property, plant, and equipment. These fixed assets were almost certainly worth less than their carrying value, as the industry had deteriorated since the company last valued them when it emerged from bankruptcy in 1945. While it wasn’t clear what they were worth, they were certainly worth something. Finally, and ultimately most importantly, Ben Graham was on P&R’s board of directors, becoming a member after purchasing the stock in 1952. Buffett, who had discovered the stock on his own, would join Graham’s firm in 1954. While Graham had not taken any significant action as a board member by then, Buffett sensed that his professor, mentor, and now boss would eventually make something happen. As he later stated, “I was just a peon sitting in the outer office… I was not in the inner circle, but I was terribly interested, knowing something was going on.

So not only were the liabilities from Allied’s bankruptcy becoming defined, but the core business was not showing any signs of stress from the scandal. That left valuation. At his $40 per share purchase price, and in contrast to most of the stocks discussed in this book, American Express did not sell for an obvious bargain price. With a $178.4 million market capitalization and $124.1 million enterprise value, the stock sold for 15.8x 1963 earnings, 7.8x EV/1963 EBIT, and 2.3x P/TB. It didn’t look that cheap, and this valuation didn’t include an adjustment for the cost of the salad oil settlement.270

The investment was approximately 14.3% of the Partnership’s assets when he wrote to Howard Clark in June 1964. But Buffett kept buying the stock as the salad oil scandal receded from the limelight. By November, he owned approximately 90,000 shares, up from the 70,000 in June. Buffett kept buying the stock into 1966, more than tripling his stake in the company: He scooped up more than 5% of American Express’s shares, up from the 1.6% stake when he wrote to Howard Clark in 1964.277 The position became such a significant percentage of the portfolio that Buffett amended his ‘Ground Rules’ to partners in November 1965, adding a seventh rule: We diversify substantially less than most investment operations. We might invest up to 40% of our net worth in a single security under conditions coupling an extremely high probability that our facts and reasoning are correct with a very low probability that anything could drastically change the underlying value of the investment.278 American Express was the Partnership’s largest investment at the end of 1965 and 1966, and it crushed the market in each of 1964, 1965, and 1966.279 The salad oil scandal was considered over by the end of 1964 despite negotiations still ongoing; the major claims wouldn’t settle until 1967, with some minor suits outside the main case lasting until the 1970s.280,281 Table 2 shows that revenue and income exploded as the Partnership added to its stake.

As anthracite production fell after the divorce from the railroad, P&R’s management raised debt to try and minimize the decay through capital investment, thinking new facilities could help the company remain competitive. But industry conditions worsened, and the Great Depression decimated economic activity, leading to significant losses for P&R throughout much of the 1930s. These results culminated in a declaration of bankruptcy in 1937.147 It took eight years for the company to emerge, but the reorganized firm possessed a leaner balance sheet, better prepared to withstand the declining market.148 Ultimately, it didn’t matter, as alternative fuel competition was simply overwhelming. As Figure 1 illustrates, production of hard coal eventually fell nearly 70%, dropping from 99.6 million tons from its 1917 peak all the way down to 30.9 million in 1953. Coal prices rose, mitigating the volume decline (as seen in Figure 2). But there was no hope that the industry would return to its former glory; anthracite coal was in an irreversible decline. This was the seemingly hopeless situation that confronted the young Warren Buffett, still in his early 20s, when he began looking at Philadelphia & Reading. Yet he started buying P&R stock at around $19 per share in 1952. When the stock soon plummeted to $9, Buffett, unphased by the decline, loaded up. By the end of 1954, he had invested $35,000 into the company, making it his largest personal position.149

In his 1961 letter to partners, Buffett laid out three broad categories of investments: generals, workouts, and controls. Generals were undervalued securities where Buffett had no say in corporate policies, nor a timetable for when the stock might reflect its intrinsic value. Buffett pointed out that the generals would behave like the Dow in the short term but outperform the index over the long term. Buffett expected to have five or six positions in this category that were 5% to 10% of total assets each, with smaller positions in another ten to fifteen. Later on, in his 1964 letter, Buffett would break generals into two categories: private owner basis and relatively undervalued. Private owner generals were generally cheap stocks with no immediate catalyst, while relatively undervalued securities were cheap compared to those of a similar quality. Relatively undervalued securities were generally larger companies where Buffett did not think a private owner valuation was relevant.173 Workouts were securities whose performance depended on corporate actions, such as mergers, liquidations, reorganizations, and spin-offs. Buffett expected to have ten to fifteen of these in the portfolio and thought this category would be a reasonably stable source of earnings for the fund, outperforming the Dow when the market had a bad year and underperforming in a strong year. He anticipated these investments would earn him 10% to 20%, excluding any leverage. Buffett would take on debt, up to 25% of the partnership’s net worth, to fund this category. While he didn’t disclose his allocation every year, he put around 15% of the partnership in workouts in 1966 but increased that to a quarter of the portfolio in 1967 and 1968, when he was having trouble finding bargains.174 The final category was controls, where the partnership took a significant position to change corporate policy. Buffett said these investments might take several years to play out and would, like workouts, have minimal correlation to the Dow’s gyrations. Buffett pointed out that generals could become controls if the stock price remained depressed.

Warren Buffett wird nicht müde zu betonen, dass es an ihm ist, sich selbst die Verwaltung des kleinsten Geldbetrages sehr angelegen sein zu lassen. Und eben darin bekundet sich jenes Verantwortungsbewusstsein, mit dem Staat zu machen ist.

In large part, companies obtain the shareholder constituency that they seek and deserve. If they focus their thinking and communications on short-term results or short-term stock market consequences they will, in large part, attract shareholders who focus on the same factors

Rather than attempt to time the market or pick individual stocks, it is more productive to invest and stay invested. As Warren Buffett said: “We continue to make more money when snoring than when active.” Mr. Buffett also said: “Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after expenses and fees) delivered by the great majority of investment professionals.

We don’t buy and sell stocks based upon what other people think the stock market is going to do (I never have an opinion) but rather upon what we think the company is going to do.

1. Investors give fund managers money at the wrong time. Now that you’ve had some time to read this book and understand the importance of buying stocks during fear cycles and holding during greed cycles, this first indicator should make sense. To understand this principle, imagine that you’re the fund manager of a $100 billion investment fund. When the stock market crashes and you’re able to purchase severely undervalued businesses with minimal debt, not only do you lack funds to invest, but all your resources are being depleted by scared investors. Instead of receiving money to buy the great deals, your investors are selling their shares in the fund and you don’t have the capacity to take advantage of the market behavior. This reason alone severely handicaps fund managers as they attempt to beat the market.

The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.10

I resurrect this “market-guessing” section only because after the Dow declined from 995 at the peak in February to about 865 in May, I received a few calls from partners suggesting that they thought stocks were going a lot lower. This always raises two questions in my mind: (1) if they knew in February that the Dow was going to 865 in May, why didn’t they let me in on it then; and, (2) if they didn’t know what was going to happen during the ensuing three months back in February, how do they know in May? There is also a voice or two after any hundred point or so decline suggesting we sell and wait until the future is clearer. Let me again suggest two points: (1) the future has never been clear to me (give us a call when the next few months are obvious to you—or, for that matter the next few hours); and, (2) no one ever seems to call after the market has gone up one hundred points to focus my attention on how unclear everything is, even though the view back in February doesn’t look so clear in retrospect. If

If a 20% or 30% drop in the market value of your equity holdings (such as BPL) is going to produce emotional or financial distress, you should simply avoid common stock type investments. In the words of the poet—Harry Truman—“If you can’t stand the heat, stay out of the kitchen.” It is preferable, of course, to consider the problem before you enter the “kitchen.

I am not in the business of predicting general stock market or business fluctuations. If you think I can do this, or think it is essential to an investment program, you should not be in the partnership.

you can think better about the market; you don’t hear so many stories, and you can just sit and look at the stock on the desk in front of you. You can think about a lot of things.” 32   Buffett

Jason Zweig, senior writer and columnist at Money magazine and coauthor of the revised edition of Benjamin Graham's classic, The Intelligent Investor: "If you buy-and then hold-a total stock market index fund, it is mathematically certain that you will outperform the vast majority of all other investors in the long run. Graham praised index funds as the best choice for individual investors, as does Warren Buffett.

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.

Of all the professional money managers, Warren Buffett’s record stands out as the most extraordinary. For over 40 years, Buffett’s company, Berkshire Hathaway, has earned a rate of return for his stockholders twice as large as the stock market as a whole. But that record was not achieved only by his ability to purchase “undervalued” stocks, as it is often portrayed in the press. Buffett buys companies and holds them. (He has suggested that the correct holding period for a stock is forever.)

Once a bull market gets under way, and once you reach the point where everybody has made money no matter what system he or she followed, a crowd is attracted into the game that is responding not to interest rates and profits but simply to the fact that it seems a mistake to be out of stocks. In effect, these people superimpose an I-can’t-miss-the-party factor on top of the fundamental factors that drive the market. Like Pavlov’s dog, these “investors” learn that when the bell rings—in this case, the one that opens the New York Stock Exchange at 9:30 A.M.—they get fed. Through this daily reinforcement, they become convinced that there is a God and that He wants them to get rich.

Those that use only fundamental variables refer only to a company's business performance, not the relationship between that performance and its share price. Studies have sorted stocks using returns on equity or on total capital invested, growth in earnings per share, growth in assets—as opposed to sales growth—and various measures of profit margins. Companies with high marks on these variables are successful firms whose shares are inherently attractive to investors. However, consistent with the studies we discussed above, it is often the firms that ranked lowest on these measures—low returns on capital or narrow profit margins—that have tended to generate the highest future market returns.

Most institutional investors in the early 1970s, on the other hand, regarded business value as of only minor relevance when they were deciding the prices at which they would buy or sell. This now seems hard to believe. However, these institutions were then under the spell of academics at prestigious business schools who were preaching a newly-fashioned theory: the stock market was totally efficient, and therefore calculations of business value—and even thought, itself—were of no importance in investment activities. (We are enormously indebted to those academics: what could be more advantageous in an intellectual contest—whether it be bridge, chess, or stock selection than to have opponents who have been taught that thinking is a waste of energy?)

An even easier route might be to just buy some B-shares of Berkshire Hathaway (ticker: BRK-B). One share of stock in this company will cost you $203.27 today. You can then sit back and relax and let Warren Buffett, Charlie Munger, and their successors do all of the hard work.

I’m convinced that there is much inefficiency in the market. These Graham-and-Doddsville investors have successfully exploited gaps between price and value. When the price of a stock can be influenced by a “herd” on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person, it is hard to argue that the market always prices rationally. In fact, market prices are frequently nonsensical.

Derivatives spread the damage throughout the world. In March 2009, when the S&P 500 had fallen 57 percent from its peak, I could not tell whether to buy stocks or to sell what I had. Either decision might have been a disaster. If we continued into a major worldwide depression, buying more would be costly. In the other scenario, the one that occurred, this was the bottom, and stocks rebounded over 70 percent in less than a year. Warren Buffett, who had better information and insight than almost anyone, later told The Wall Street Journal’s Scott Patterson that at one point he was looking into the abyss and considering the possibility that everything could go down, even Berkshire Hathaway. It was only when the US government indicated it would do whatever was necessary to bail out the financial system that he realized we were saved.

Stocks are ownership shares of businesses,” which “you’re valuing and trying to buy at a discount.” The key, then, is to identify situations in which there’s a particularly large spread between the price and the value of the business. That spread gives you a margin of safety, which Greenblatt (like Graham and Buffett) regards as the single most important concept in investing.

Despite its having increased by a multiple of more than 23 in fourteen years, I made my first purchase at $982.50 a share and continued to accumulate stock. By contrast, in 2004 I was talking to a bank president in San Francisco when he mentioned that his mother had been a limited partner in Buffett Partnership, Ltd., and received some Berkshire stock as part of her distribution when the partnership closed. “That’s wonderful,” I said. “At today’s prices [then $80,000 a share or so] she must be very rich.” “Sadly,” he said, “she sold at $79 for a several hundred percent profit.” If asked for advice, I recommended the stock to family, friends, and associates with the understanding that it was a long-term holding with a possibly volatile future. I didn’t suggest it to those who couldn’t understand the reasoning behind the purchase and who would be scared by a big drop in price. The response was sometimes frustrating.

Legg Mason was a value shop, and its training program emphasized the classic works on value investing, including Benjamin Graham and David Dodd’s Security Analysis and Graham’s The Intelligent Investor. Each day, the firm’s veteran brokers would stop by and share their insights on stocks and the market. They handed us a Value Line Investment Survey of their favorite stock. Each company possessed the same attributes: a low price-to-earnings ratio, a low price-to-book ratio, and a high dividend yield. More often than not, the company was also deeply out of favor with the market, as evidenced by the long period the stock had underperformed the market. Over and over again, we were told to avoid the high-flying popular growth stocks and instead focus on the downtrodden, where the risk-reward ratio was much more favorable.

Buffett himself is a grand master of simplification. Writing to his shareholders in 1977, he laid out his four criteria for selecting any stock: “We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price.” These may not strike you as earth-shattering secrets. But it’s hard to beat this distillation of eternal truths about what makes a stock desirable.

​“Intrinsic value can be defined simply: it is the discounted value of the cash that can be taken out of a business during its remaining life.” -Warren Buffett

It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price” - Warren Buffett

Financial strength and capital structure. The most basic possible definition of a good business is this: It generates more cash than it consumes. Good managers keep finding ways of putting that cash to productive use. In the long run, companies that meet this definition are virtually certain to grow in value, no matter what the stock market does. Start by reading the statement of cash flows in the company’s annual report. See whether cash from operations has grown steadily throughout the past 10 years. Then you can go further. Warren Buffett has popularized the concept of owner earnings, or net income plus amortization and depreciation, minus normal capital expenditures. As portfolio manager Christopher Davis of Davis Selected Advisors puts it, “If you owned 100% of this business, how much cash would you have in your pocket at the end of the year?” Because it adjusts for accounting entries like amortization and depreciation that do not affect the company’s cash balances, owner earnings can be a better measure than reported net income. To fine-tune the definition of owner earnings, you should also subtract from reported net income: any costs of granting stock options, which divert earnings away from existing shareholders into the hands of new inside owners any “unusual,” “nonrecurring,” or “extraordinary” charges any “income” from the company’s pension fund. If owner earnings per share have grown at a steady average of at least 6% or 7% over the past 10 years, the company is a stable generator of cash, and its prospects for growth are good.

One of the most fundamental concepts of making money in the stock market is buying a company that you can hold forever.

Simply estimate where earnings per share (EPS) will be in 5 years from now. Slap a 15 multiple (P/E) on that number and you have a reasonable price target for the stock. Warren Buffett uses a similar trick all the time.

For indisputably skilled investors like Warren Buffett, wide diversification would be foolish, since it would water down the concentrated force of a few great ideas. But for the typical fund manager or individual investor, not diversifying is foolish, since it is so difficult to select a limited number of stocks that will include most winners and exclude most losers. As you own more stocks, the damage any single loser can cause will decline, and the odds of owning all the big winners will rise. The ideal choice for most investors is a total stock market index fund, a low-cost way to hold every stock worth owning.

Stocks During Fear Cycles (Recessions): These are the least risky and most profitable times for purchasing stock. During Greed Cycles (Bull Markets): These are the most risky and least profitable times for purchasing stocks. Bonds During Fear Cycles (Recessions): These are the most risky and least profitable times for purchasing bonds.

Seasoned investors like Warren Buffett, Thomas Rowe Price Jr., John Neff, Jesse Livermore, Peter Lynch, and many more, practice this strategy of finding the best available alternative before investing a considerable sum.

The fact is almost anyone can achieve positive absolute returns in a trending up market. Watch TV and listen to market pundits, buy the hot stocks of the day, and ignore valuation. Growth and momentum have been the lessons learned by new portfolio managers in the 2010s. Only when the tide goes out, do you discover who has been swimming naked. —Warren Buffett When the tide goes out, good investors create outperformance. Global central banks have made sure the tide has not gone out for a decade. US equity market drawdowns of more than 10% have occurred only four times in the last decade and each drawdown has lasted less than 60 days.

When you build a bridge, you insist that it can carry 30,000 pounds, but you only drive 10,000 pound trucks across it. You require a margin of safety, and rightly so.” Warren Buffett

Stop trying to predict the direction of the stock market, the economy, interest rates, or elections.

We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price. 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. 1977

By the late 1960s, however, the rising market had made investing in stocks less viable. The advantage of celebrity when trying to buy entire businesses began to outweigh the benefit of secrecy in buying stocks.

So far in 2008, the company had spent more than $3 billion buying its own stock. And in 2007, GE had spent $15 billion on its shares. Over the entire period, GE paid an average price of about $37.50 for half a million shares worth more than $18 billion. Now, it would sell almost 550,000 shares back to the market for $22.25 a share in order to raise $12.2 billion. By selling shares back to the market at a much lower price, GE was wiping out more than twice the amount of cash that the deal with Buffett had yielded. It was a disastrous use of the equity markets, and it wouldn’t be the last time.

Many years ago, the famous investors Benjamin Graham and Warren Buffett made a lot of money using a very simple version of this strategy. They would look for a company that had net cash of $20.00 per share, and then try to buy shares of its stock for 15. In other words, they were trying to buy a dollar for 75 cents, or even less. Or they would just buy stock in a company that had a P/E of just 5 or 6.

This is often referred to as the “earnings yield” of a stock. You can calculate it in one of 2 ways: 1. Earnings per share divided by the stock’s price per share 2. Net profit divided by the market cap