15 Actionable Quotes from Warren Buffett’s 2015 Annual Report

How to Apply to Your Portfolio: Invest in highly efficient, low cost leaders in industries that are likely to exist far into the future.

On Overpaying

“Of course, a business with terrific economics can be a bad investment if it is bought at too high a price.”

This is best thought of by looking at the earnings yield of a business. If a company is growing at 25% a year but has an earnings yield (earnings divided by price) of just 2%, it will take around 6 years for the business to have an earnings yield on cost of 8%.

You could get the same 8% earnings yield today by investing in a business with a price-to-earnings of 12.5 – and not have to wait 6 years and risk the growth not being as high as expected.

Great businesses are only great when they trade at fair or better prices.

How to Apply to Your Portfolio: Don’t invest in businesses trading significantly above their historical average price-to-earnings ratio, or the price-to-earnings ratio of the overall market. The 8 Rules of Dividend Investing takes valuation into account to find high quality businesses trading at fair or better prices.

Final Thoughts

Warren Buffett’s quotes illuminate his investing style.

Boiled down to its core, Buffett looks for the following in an investment:

– Strong and durable competitive advantage

– Efficiency focused management

– Fair or better price

If a business fits the 3 criteria above he will hold it for the long run – often for decades.

Warren Buffett has used this relatively simple approach (applied extremely intelligently) to become one of the richest men in the world.

His take on the economy, investing, and politics is well-reasoned and well thought out. This makes his annual reports important reading for investors serious about investing in great businesses.

Disclosure: None