Here on The Value Perspective, we will often use quotes from other people because, while it may hurt a little to admit it directly, we ultimately understand we do not have a monopoly on keen insights into the world of investment. We also understand that when you use someone else’s quote, it is important to put a bit of thought into what it is they actually meant by it.
Over the last few weeks, though, we have come across a number of examples of commentators using well-known and learned investment quotes from well-known and learned investment folk to make a point – and in so doing completely butchering the original meaning. Warren Buffett – arguably the most quotable of all investment experts – has been a notable casualty.
Take his oft-quoted line “it’s only when the tide goes out that you learn who’s been swimming naked” – we recently saw this used to have a dig at a cyclical business, whose profits had fallen when the cycle turned. The implication was that the company had been doing something it should not have been while the cycle was in its favour and investors therefore ought to steer clear of it in future.
But the profits and sales of cyclical businesses go up and down according to where they are in the cycle. That is just what happens and indeed is why they are called cyclical businesses. It therefore does not automatically follow that a fall in profits means the management were metaphorically skinny-dipping – that they did something wrong or were somehow being irresponsible.
Some of the most responsibly-run companies we come across as investors are cyclical ones precisely because they are subject to a cycle. take a sector such as recruitment, where management can either work with the cycle of companies hiring and laying off staff and plan accordingly or they can work against it, in which case they are unlikely to stay in business very long.
The other Buffett quote we recently saw misused – and by someone, frankly, we might have hoped would know better – was “rule 1 is ‘never lose money’; rule 2 is ‘never forget rule 1”. In this instance, it was effectively being translated to mean “don’t ever do anything that might result in you losing money”. Yet, we would argue, this recipe for blanket risk aversion is absolutely not the point Buffett was looking to make.
Surely the line is highlighting the importance we should attach to preserving our capital as investors, rather than calling on us to avoid risk at any cost. after all, there are numerous examples from Buffett’s own career that demonstrate he has been perfectly comfortable taking risks whenever he has deemed it appropriate to do so in pursuit of a large enough reward.
Using quotations to help make points about investment is all well and good, not least because they will often communicate sensible ideas in a memorable and vivid way – possibly too much so in the case of the swimming naked line. Like anything else, however, if used incorrectly or out of context – whether intentionally or otherwise – to help justify an argument, they can also be very misleading.