Warren Buffett Quotes

Warren Buffett quotes on money. How Warren Buffett got rich and his attitude towards money.

Strong Conviction that he will be rich

Biographies of Warren Buffett such as Alice Schroeder’s ‘Snowball’ and Roger Lowenstein’s ‘Buffett: The Making of an American Capitalist’ often describe how this man who was at one time the richest man on the planet had a strong conviction that he will one day be rich even as a precocious young child. He would tell his classmates and neighbors that he would be rich before he turned thirty-five in a perfectly serious tone, with not a touch of arrogance or idealism – he just saw it as a foregone conclusion. He told Mary Falk that would make a million dollars before he turned thirty – a less audacious goal now, but very audacious back then.

The Fun of Making Money

One of Warren Buffett’s favorite books as a child was ‘One Thousand Ways to Make $1,000’. From peddling newspaper subscriptions to investing in pinball machines, Warren Buffett constantly thought about ways to make money. However, this desire to make a lot of money did not stem from a love of money itself. Warren Buffett was often cited as saying that he likes money not for money’s sake – rather, he likes the fun of making money and watching the marvel of money compounding – sometimes called the 8th wonder of the world.

Child of the Great Depression

Warren E. Buffett was born in 1930. As a child born during the Great Depression, Warren Buffett has strong memories of what it was like to grow up in such an era. He has a newspaper clipping of the 1929 stock market crash in plain view on his wall as a constant reminder to himself not to get caught up in the madness of crowds and the euphoria of the market.

Warren Buffett quotes on options. Why Warren Buffett disapproves of options and his thoughts on options backdating.

Options as Executive Compensation

Warren Buffett often states that he does not approve of options. This is because options carry with them a perverse risk-reward system that he does not like. Options gave its holders the potential for significant rewards without any risk – thus, those who hold options have nothing to lose when they are taking business risks and everything to gain. They might thus be more likely to engage in risky behavior that would not be in the interest of shareholders.

In contrast, if management were given shares instead of options, the interests of management and shareholders would be better aligned, as management would then share in both the risks and the rewards of their business decisions.

Limited Executive Compensation

Buffett likes to limit executive compensation in the form of salaries in general, as over the top executive compensation hurts shareholders directly. Thus, the perk of working as a manager might not be the compensation, but this is often outweighed by the significant autonomy that Buffett gives his managers. He is very trusting of his managers and also a good motivator who can get his managers to put in their very best.

Warren Buffett: Options Backdating

The other options-related issue that Warren Buffett has spoken out strongly about is the issue of options backdating. In the past, some companies have retroactively adjusted the grant dates of options in order to increase their value. Apple, for example, discovered issues with options backdating during the Dot Com Bubble, leading to the resignation of Apple CFO Fred Anderson. Buffett argues that regardless of whether this is legal, it is unethical and would not be tolerated in any of the Berkshire subsidiaries.

Warren Buffett quotes on management. What Buffett looks for in his managers and what it takes to create quality management teams.

Avoid the Big Egos

Buffett has said on many occasions that his managers are extremely important. A large part of making good investments is selecting good managers who are reliable, motivated, and can be trusted. According to Buffett, the reason many acquisitions do not work well is that they either lack excellent managements or the nature of the business has poor economics.

The problem is that many of these mergers are motivated by big egos, with the notion that making deals is sexy; existing managers can often be caught up with the notion of making deals just for the sake of making deals. This leads to almost nonsensical deals at times – these deals create big splashy headlines but might add little shareholder value.

Management Warren Buffett likes

What kinds of management does Warren Buffett like? He likes managers who are frugal – the CEO drives an ordinary car and lives in an ordinary house and does not feel anything weird about that. The managers he would avoid are those who have a large tendency to want to brag.

He also likes managers who are not self-aggrandizing. His ‘sort of guy’ would be the manager who would not waste money on painting his office.

Managing his own Managers

Buffett has a very hands-off management approach. For example, with Berkshire Hathaway when it was still a textile company, he asked Ken Chace for monthly financial reports, but did not want any quarterly projections and other reports that were largely a waste of time.

Warren Buffett emphasizes having a personal connection with each CEO. ‘Like a kid on report-card day, managers hated to bring Buffett bad news’ – great way to ensure that managers do their best.

Warren Buffett quotes on leverage. Why Warren Buffett avoids debt – and what alternatives to debt he uses to still gain leverage.

Debt/Borrowed money is the weak link

Warren Buffett writes that debt can often be the fatal weak link that leads to the terrifying collapse of a fund that might always have had a stellar record of outperforming the market. In 1998, it was Long Term Capital Management. Exactly a decade later, it was Lehman Brothers. History has a way of repeating itself that we should all take heed as aspiring investors.

Senior notes through Salomon Brothers

However, there were still a few times when Warren Buffett did use debt. In 1973, he borrowed money when he saw too many opportuntieis in the market but had too little cash to invest. Thus, he raised $20 million in senior notes through Salomon Brothers, but made sure that the borrowed money satisfied two conditions: first, it was cheap; second, it could be structured on a long-term fixed rate basis (so it would remain cheap).

To finish first, you must first finish

Another way to explain the point above is another quote from Buffett: “As one of the Indianopolis ‘500’ winners said, ‘To finish first, you must first finish.’” Buffett has always felt a strong sense of obligation to his investors, who may have entrusted a significant portion of their wealth to him. Instead of worrying about whether he may be forced into a compromising position because of the debt he might have assumed, he tries to avoid the situation altogether. He observes that in retrospect, he could probably have used debt to juice up his returns a little and have succeeded on most occasions, but he values a good night’s sleep more than a few extra percentage points in return.

Alternative Sources of Leverage

Instead, Buffett prefers the following alternative sources of leverage: float, and deferred taxes. These alternatives are cost-free, have no covenants or due dates attached, and thus are much safer sources of leverage.

Warren Buffett quotes on life. Warren Buffett on what it takes to live a good life.

Wanted to make a very clean type of income. A couple of times I remember saying, “Gee, Warren, this thing isn’t reported” [to the government]. And he said, “I’m putting it in.”

Do what you love

Warren Buffett and Bill Gates attended a forum together at the University of Washington Business School many years ago. When asked on his thoughts on life, Warren Buffett noted emphatically that you have to do what you love. Those people who think they have to do this, then that, so they can get to X and Y are kind of like “saving up sex for old age”. Rather, we will be much happier and probably more successful in the long-run if we make sure we are doing what we love at every moment in time.

Always be humble

Warren Buffett emphasizes how important it is to always be humble. When you are feeling that you are ‘on a roll’, you should all the more be circumspect. For example, when writing his letters to his shareholders, Buffett was always careful not to over-promise. Instead, although he had been beating the market consistently more many years, he always noted that his advantage over the Dow may not be sustainable, and sometimes even comments in certain terms that what he has attained should be considered ‘decidedly abnormal’, and that the Buffett partnership will have ‘loss years’ where it is ‘inferior to the Dow’.

Such an attitude helps Warren Buffett always stay on his toes and never be complacent. Charlie Munger advises that one should always use checklist routines to ensure that we avoid big mistakes or omissions in our thinking. This is all part of always staying humble regardless of how much success one has already attained; that is the only way to sustain that success – too many have risen and then fallen because of the burden of their hubris.

Warren Buffett quotes on insurance. Berkshire Hathaway’s insurance operations played a very important role in the company’s success.

Buffett used cash generated by his textile operations to fund entry into the insurance business by purchasing National Indemnity Company in 1967.

Insurance Float

Why does Warren Buffett like insurance companies? These companies are attractive because of their float, or cash with a near-zero cost of capital, that comes from the insurance premiums insurance companies collect every month. It is a good source of other people’s money that Warren Buffett can use to make acquisitions and other types of investments interest-free.

There were also tax benefits to doing so, for corporate income tax rates are typically lower than personal income tax rates. Thus, using insurance companies as investment vehicles lowers the tax Buffett has to pay on capital gains.

General Re

General Re was the largest reinsurance company in America. It also had a large international presence and earned $1 billion a year in the years before Buffett’s purchase. Buffett argued that the investment was advantageous because of the synergies that it could generate. He notes that after the merger, General Re would be able to focus on its world-class underwriting instead of having to worry about tax considerations and earnings volatility.

However, many analysts believed that Buffett’s acquisition of General Re might be a mistake. General Re lost more than $7 billion in the four years after Buffett’s acquisition, compounded by the effects of the 9/11 terrorist attacks. General Re management was also dissatisfied with the purchase – General Re’s president James Gustafson resigned after the Berkshire merger; a number of other senior executives also openly expressed discontent. Buffett later hypothesized that if General Re had remained independent, it might not have survived the 9/11 attacks.

Dry Powder Cash

Nonetheless, with the merger, Buffett could argue that even if the underwriting operations did not turn a profit, Berkshire would gain free use of float as long as the reinsurer was not loss-making – the dry-powder cash with a zero cost of capital has great value for Berkshire.