Getting a Gauge on the Sage

October 26, 2015 11:40:46 AM

It has been said that everyone loves a winner. It’s a quote that we think applies to Warren Buffett. His style of portfolio ownership is, without a doubt, the highest sought after and desired. Everyone wants to be like Warren. Without question, Buffett’s success speaks for itself. We have documented the chart below on many occasions... it clearly shows Berkshire’s complete trouncing of the S&P 500 over the past 50 years.

Berkshire Performance vs S&P 500

In addition to Buffett (aka The Oracle of Omaha or The Sage) being a highly respected money manager, he also has a strong, cult-like following. His following is, part in parcel, due to his whit, humility and his many quips. We believe the most profound fact about Mr. Buffet is the laundry list of quotes that can be attributed to him over the years. Many of us in the industry use these insightful quips on a regular basis and find them to be the academic equivalent of “Yogism’s”, the humorous quotes made by baseball hall of fame New York Yankee, Yogi Berra.

I recently came across an article listing more than 20 Buffett quotes and sought to put them to the test. Will Warren’s quotes be supported by empirical data and do they stand the test of time? We chose our Top Ten quotes and sought to find whether or not they truly “hold water.” “Getting a Gauge on the Sage” is our attempt to both measure the accuracy of Buffet’s quotes using research, which we display in chart form, and to have some fun. We hope you enjoy our review.



1. “What we learn from history is that people don’t learn from history.”


Buffett, in our estimation, nailed this one. Like a true business owner, Mr. Buffett sizes up the probability that he will be rewarded for his purchase when he decides to take ownership in a publically-traded company (i.e. buy its stock). He is well aware that business ownership is the greatest pathway to wealth creation, accumulation and distribution (he loves dividends and is not fond of bonds). The chart above is tattooed on Buffett’s forehead, in so much as he realizes it is time spent in the market, not timing the market, that works. Going to cash, buying put options and shorting stocks are not in Buffett’s lexicon. He simply analyzes the fundamentals, allows time to take its course and never forgets the historical relationship between prices and the probabilities of positive returns.


2. “Two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. ... We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”


They don’t get any better than this one, which quite frankly may be the most ubiquitous of all the Buffett quotes. So, is it actually profitable to sell when the crowd is buying and buy when they are selling? The chart to the right, from Zero Hedge, would suggest the answer is an emphatic “Yes!!”




3. “Our favorite holding period is forever.”


Based on the adjacent chart, developed by Jeremy Siegel and found on:, we can clearly see why Buffett’s favorite holding period is “forever.” On average, upon reaching a ten-year holding period, owning stocks do a better job of reducing risk than owning bonds. This is a common misconception, and one that highlights the power of owning quality businesses over time.





4. “Never invest in a business you cannot understand.”


Buffett’s method of analyzing businesses is simple, yet profound. He loves businesses that make solid, high quality products or services, deliver a high return on capital, pay a dividend and grow that dividend over time. The chart above demonstrates the correlation between historic returns and a businesses commitment to paying dividends. The more transparent a business is, i.e. one that returns capital to shareholders and grows the dividend stream over the long haul, the more worthy of ownership the business.



5. “What counts for most people in investing is not how much they know, but rather how realistically they define what they don’t know.”


If there were anyone who is worthy of pounding his own chest in a show of pride, it would be Buffett. However, he refuses to stoop to that level; rather, he warns us to be very leery of those who claim to be “know-it-alls.”







6. “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”


After each correction, and there have been eight of them over the last 25 years, it is quality businesses that have rebounded the quickest and shot-up the highest. The chart above speaks very mightily to this point.





7. “We have long felt that the only value of stock forecasters is to make fortune-tellers look good.”


I’m amazed at how many investors take market forecasters seriously, even when they have no credible track record of success. Very simply, can you name one individual who is able to accurately predict the future? I think you get our point, and Mr. Buffett’s as well.







8. “You shouldn’t own common stocks if a 50% decrease in their value in a short period of time would cause you acute distress.”


The uniqueness of Buffett is that he prays for stocks to drop in value... the more the merrier. He acutely understands the chart above... when there is fear in the streets; bring your buying list and checkbook!



9. “I will say this about gold. If you took all the gold in the world, it would roughly make a cube 67 feet on a side... for that same cube of gold, it would be worth at today’s market prices about $7 trillion — that’s probably about a third of the value of all the stocks in the United States. For $7 trillion, you could have all the farmland in the United States, you could have about seven Exxon Mobil Corporations plus a trillion dollars of walking-around money. ... If you offered me the choice of looking at some 67-foot cube of gold all day, call me crazy, but I’ll take the farmland and the Exxon Mobil Corporations.”


Yes, our chart is slightly dated, but the time frame from 1987 - 2010 supports Mr. Buffett opinion on Gold. Despite all of the hoopla surrounding Gold, it really does not perform very well over time compared to owning quality businesses over time. Buffett understands that the pathway to wealth accumulation and preservation is business ownership!



10. “You only have to do a very few things right in your life so long as you don’t do too many things wrong.”


A simple, four-component investment strategy, that encompasses the following, is what Buffett does best:

Philosophy – buying high quality businesses when they are on sale.

Strategy – using volatility to both reduce ownership when prices are elevated and increase ownership when prices are deflated.

Flexibility – ignoring benchmarking, style boxes, peer groups and other manager constraints that fetter sound decision-making.

Transparency – like Buffett’s famous annual shareholder’s meetings in Omaha, being open, honest and up-front with your investors on a regular basis regarding what they own and why they own it is paramount to earning the trust and honor of your clients.


You would be hard pressed, whether in the investment field or any other field, to find someone who vehemently disagrees with the idea that Warren Buffett is the greatest investor of his time. In fact, there are a large number of financial professionals who use his quotes in exposing investment theory, as well as those who attempt to replicate his ingenious and unique, yet simplistic, style of asset management. What we find to be profound about Buffet is not that there are many who seek to be like him, but rather, is the fact that even those investors who end up being dismissive of his investing rules, still hold him in the highest regard and call him a genius. We encourage you to reflect on your investing rules and think about the following statements:

• I believe that Buffett’s approach of owning a select group of “top businesses” is the optimal way to approach investing, yet, as an investor, I have thousands of “stocks” in my portfolio.

• I believe, like Buffett, that economic forecasting and numerical predictions are folly, yet, as an investor, I constantly ask my advisor questions about what is going to happen in the “markets.”

• I believe, like Buffett, that buying stock in great companies when others are fearful (and when the price is low), is better than buying at elevated prices. Yet, as an investor, I move my portfolio to cash when the market appears to being falling and miss out on the opportunities (and the lower prices) that the market fear creates.

We believe that if you want to be like Buffett, you have to do more than recite his truisms, you must put them into practice — walk the talk. At Nepsis, we work with our investors to help them develop an understanding of their investments so they gain the comfort needed to take advantage of opportunities the market provides.

It’s an idea we call... Investing With Clarity™.

Mark Pearson

Mark Pearson

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