Recently, as we start each week afresh, I’ve been drawing inspiration from the great investor, Warren Buffett. As you are no doubt already aware, Buffett is the Chair and CEO of Berkshire Hathaway Inc. (NYSE: BRK.A) (NYSE: BRK.B) and arguably the world’s most successful investor. Our Motley Fool colleagues over in the United States have put together a comprehensive list of Buffett’s best quotes, which you should definitely check out when you have time.
But here are 3 quotes that I think have particular wisdom worth absorbing this week!
“For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favourable business developments”
Here Buffett is warning about the dangers of assuming you can pay any price for a top-notch company. I believe investors often fall into this trap. When they see a company that is growing fast, they figure it’s better to buy the overvalued shares than miss out entirely. In my opinion, we have seen this play out recently with WAAAX shares like Afterpay Ltd (ASX: APT) and Xero Limited (ASX: XRO). While buying into a winning company can feel good for a while, Buffett is warning that paying an overinflated price can lead to a path of wealth destruction in the end.
“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage”
This Warren Buffet quote is a great lesson for us all to keep in mind. Some investors often assume that just because a company is a ‘disruptor’, this automatically makes it a good investment. Disrupting an industry can be a winning strategy, but only if the company is able to hold on to its ‘moat’, or competitive advantage.
Just take Nokia, for example. This company pioneered mobile phones back in the day, but today is not really around to keep extracting its share of the spoils. That honour belongs to the likes of Apple, Alphabet and Samsung. These are all companies that could do what Nokia did, only better. No wonder Warren Buffett owns shares of Apple.
“Predicting rain doesn’t count, building the ark does”
I think this Warren Buffett quote is particularly relevant in 2020. This is a year that has already brought unprecedented volatility to our share market. There’s always a conga-line of doomsayers ready to tell you when the next share market crash or recession is about to hit. As Buffett also espouses, however, it doesn’t matter how right they are, but how you prepare for it. Remember, even a broken clock is right twice a day!
Recessions and market crashes have often resulted in Warren Buffett becoming richer. Now that’s something I think we could all draw inspiration from in the current climate.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Sebastian Bowen owns shares of Alphabet (A shares). The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (A shares) and Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short June 2020 $205 calls on Berkshire Hathaway (B shares). The Motley Fool Australia owns shares of AFTERPAY T FPO and Xero. The Motley Fool Australia has recommended Alphabet (A shares) and Berkshire Hathaway (B shares). We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.