Ashleay: Welcome to iA Financial Group’s “In Your Interest!” podcast. My name is Ashleay, and this week we’ll be looking at some of Warren Buffett’s most memorable quotes. So hi, Sébastien.
Sébastien: Hello, Ashleay.
Ashleay: As always, great to have you on the podcast.
Sébastien: It’s great to be here. And the topic today is very interesting because, you know, in September we have the National Read a Book Day.
Sébastien: And we like to post on social media and, you know, propose books to our followers. And one of the books that I wanted to propose for a while and that, you know, this was my recommendation this year, is a book called “The Essays of Warren Buffett,” which is very, just simply, they looked at the annual letter to the shareholders that Mr. Buffett is very famous for publishing every single year, and it’s simply rearranged by theme so that you can have, you know, an insight into all of the wisdom of Mr. Buffett, who is always considered as pretty much the best investor in the history of humanity. So we’re lucky to have someone like that walking on Earth with us right now. And we thought maybe that we could look at some of the tidbits that are left in his writings because Mr. Buffett is very good at, you know, producing some very powerful images that give you a very good summary of what it is to be an investor.
Ashleay: So if we start with your first quote: “Price is what you pay and value is what you get.” What’s the importance of understanding the difference between price and value when it comes to investing?
Sébastien: Yeah, this one comes first and I say it really hits home because it reminds investors that solid long-term investments are generally backed by real value adding activities. So, for example, if you buy equities, you’ll have access to the earnings growth of America’s or Canada’s or global businesses. If you invest in bonds, you get interest payments from governments or corporations. If you buy real estate, you’ll have leases or even you can, if it’s a house that you buy, you will have the service that the house gives you in your life. So you’re going to get something that’s very value adding compared to trendy investments like, for example, crypto, NFTs and meme stocks that fail to hit the mark. That means that, you know, typically when you buy trendy investments, people are buying it for a price and they are thinking that they will be able to sell it at a higher price in a very short time for profit. So this is the definition of speculation. So you know what price you pay for something. You’re hoping that the price will be higher later on. But if you invest for the long run, you want to invest in value adding activities. So this is why this is number one here.
Ashleay: And your second quote is actually quite funny, really. But it also begs a more serious question. So: “Only when the tide goes out do you discover who’s been swimming naked.” So how can we distinguish between investors and speculators when it comes to risk management?
Sébastien: Yeah, as you said, sound risk management is key for you. If you go to the beach and you say, “Well, I’ll be in the water anyway, so why wear a bathing suit?” Well, eventually you’ll need to get out of the water or the tide might fall, so you might. That’s why risk management means wear a bathing suit. The same thing applies to investment. Everyone can get lucky and look good when fortune smiles. When the tide rises, it rises for everyone. But it’s only when the going gets rough and that the tide falls that you can distinguish between investors and speculators. So this is an important idea to keep in mind. Those that only talk about their investments when the tide is rising are not those that you should listen to. And it’s also a reminder to keep your emotions in check. It might be tempting to neglect risk management when the tide is rising, but you don’t want to be that one person who is standing there naked for everyone to see when, and it always does, the market gets volatile again and a correction hits.
Ashleay: And the next quote is my personal favourite: “We simply attempt to be fearful when others are greedy and to be greedy when others are fearful.” So why is that important?
Sébastien: Yeah, so similar to the previous one. It pays to not get overexcited when the going is good and everyone feels like investing is an easy game, but it also pays to start dipping your toes when no one wants to touch the market. You know, every great investment idea was born in a period of uncertainty. That’s why investing is a hard business. And when valuations are low, keeping a level head will always beat acting on emotion. So remember that prices move based on the behaviour of the marginal investor. If everyone has bought already, then the sellers will move markets and the reverse is also true.
Ashleay: And the next one I find both fascinating and sad in a way: “What we learn from history is that people don’t learn from history.”
Sébastien: Yep. Investing is a long-term game played in short successive segments. This is really how we should see it. And humans are by nature impatient, especially when it comes to their money. And I always like to say that the most costly, dangerous words in investing are quote, “This time is different.” The mistakes get repeated time and time again. You can say, “Well, I study history. I look at history.” But, you know, you need to learn that human nature is the one constant through time. And even though you know that, for example, monetary policy acts with lags and that, you know, following strong hikes in interest rates, usually the economy slows down. Well, we see through time, when you look at the paper clips, that everyone is saying, well, this time is different because of reason A, B and C, and you know, you get caught by a falling tide. So this is something that is very true, even though it is sad. But human nature is the one constant thing through time and impatience here opens up opportunities for the patient people.
Ashleay: And the next quote: “Someone is sitting in the shade today because someone planted a tree a long time ago.” What does Mr. Buffett mean in this case?
Sébastien: This is very poetic and it’s a very nice picture. So keep that in mind when you’re investing for the long run. Everyone knows that they should play the long game. Yet we are prone to emotions and we eventually shoot ourselves in the foot by being reactive and not sticking to the plan. So the solution to that is think of your future self as that person sitting in the shade many years from now. Get working on planting and watering that tree right away.
Ashleay: And the next one almost reminds me of a fight club quote: “Rule number one, never lose money. And rule number two, never forget rule number one.”
Sébastien: Yep. So that’s a pretty simple rule. And every dollar that you lose along the way is a dollar that won’t grow for you through time. So if you assume a compound annualized rate that is about 5%, every dollar that you lose in your life by, let’s say, panicking, selling your assets at the wrong time because you think you’ll be able to buy again lower at a lower price, but typically you can’t, so you just, you know, you lock in these losses through your life. Well, every dollar that you lose after 30 years is 4.3 dollars at the end of your life. So it’s a return of 330% that you’re leaving on the table. So basically, if you do the math, every time that you lose a dollar, you forfeit more money in the future. So keeping in mind that you should never lose money, just play the long game. Don’t lock in losses. That’s sound advice there.
Ashleay: I see. And once again, well, a big thank you to you, Sébastien, for your enlightening explanations on the topics we covered today in this episode. And thank you to Frédérick Montplaisir and Simon Céré for our amazing podcast music. And if you enjoyed this episode, please don’t hesitate to share it. We’ll see you next week. And if you would like to learn more about economic news, please subscribe to our podcast at your convenience. It’s available on all platforms, and you can also visit our Economic News page on ia.ca and follow us on social media. Love this podcast? Want to know more about economic news? Follow our “In Your Interest!” podcast available on all platforms. Visit the Economic News page on ia.ca or follow us on social media.