Chewing gum doesn’t change much. Neither does The Coca-Cola Co (NYSE:KO), or banking with Wells Fargo & Co (NYSE:WFC), or Ketchup at Kraft Heinz Co (NASDAQ:KHC). Buffett invests in slow changing businesses because they will compound growth over the long run. The 8 Rules of Dividend Investing help investors quickly identify high quality dividend paying businesses trading at fair or better prices.
You can find high quality businesses with strong competitive advantages quickly by looking at the following stock lists:
– Dividend Aristocrats: 50 stocks with 25+ years of consecutive dividend raises
– Dividend Kings: 15+ stocks with 50+ years of consecutive dividend raises
Businesses in rapidly changing industries have shorter periods of time in which they can compound investor wealth.
Now that we have covered what to buy, it is time to see Warren Buffett’s thoughts on when to buy.
8 Quotes from Warren Buffett on When To Buy
Warren Buffett’s buying wisdom can be condensed into 2 statements:
1. Buy great businesses when they are trading at fair or better prices.
2. This occurs when short-term traders become pessimistic
The 8 quotes below clarify Warren Buffett’s thinking on when to buy great businesses.
“Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
In the quote above, Buffett explains that he acquired his value-focused mindset from his mentor Benjamin Graham. Graham was the father of value investing and a fantastic investor in his own right. It makes sense that his philosophies significantly influence Warren Buffett.
There is a stark difference in investing style between Graham and Buffett. Graham focused on deep value plays – businesses that were trading below liquidation value. These were typically poor businesses that were undervalued because they had such bad future prospects.
Buffett focuses on great businesses trading at fair or better prices, as the quote below clarifies:
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”
Wonderful companies compound your wealth year-after-year. Poor quality businesses that are exceptionally cheap only grow your wealth once (when you sell them – hopefully for a profit).
Note that Buffett does not say to buy great businesses at any price.
“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.”
Overpaying severely limits the growth of your wealth. If you pay for a large part of future growth today, you will not benefit from that growth down the line. Great businesses can be very overvalued…
“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”
You don’t need to be a contrarian to do well in investing, but you do need to exhibit emotional control and be realistic.
Just as great businesses can be overvalued, they can also be undervalued.
“The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.”
It’s not easy to buy great businesses when they are ‘on the operating table’. That’s because the zeitgeist is decidedly against buying – stocks become undervalued because the general consensus is negative. Intelligent investors profit from irrational fears.
“Be fearful when others are greedy and greedy only when others are fearful.”
Fear and market corrections create opportunities for more patient, long-term investors. The two quotes below expand upon this.
“So smile when you read a headline that says ‘Investors lose as market falls.’ Edit it in your mind to ‘Disinvestors lose as market falls—but investors gain.’ Though writers often forget this truism, there is a buyer for every seller and what hurts one necessarily helps the other.”
&
“The most common cause of low prices is pessimism—some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.”
Paying too high a price is an investing risk that can be avoided (for the most part) by staying disciplined.
Buying is only half of investing. The next section covers when to sell.
