Friday, November 11, 2011

Warren Buffet on Market Fluctuations

Recent market movements will have caused many "investors" to be scared.  Yesterday I talked with a coworker who said she very upset that her mutual funds were down significantly in September.  I have received emails from fellow investors who have said the recent market movements have made their stomach's churn.  I have heard some say that you should sell your stocks and wait for the mess in Europe to sort itself out. 

In times like these it becomes clear who who should and shouldn't be managing money.  I'm sure many of my readers will have read many of the quotes below but quickly forget them and act differently when markets go crazy.  If you read my first post on this blog (Are You a Value Investor?) I made the case that many understand value investing but don't practice it. 

During times like these it is always good to review some Warren Buffett quotes on market fluctuations.  I hope they help you put things in perspective. 

  • We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short term market forecasts are poison and should be locked up in a safe place, away from children and also from grown-ups who behave in the market like children. 
  • The most common cause of low prices is pessimism – sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It is optimism that is the enemy of the rational buyer. 
  • Success in investing doesn’t correlate with I.Q… Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing
  • The stock market serves as a relocation center at which money is moved from the active to the patient
  • Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greed and greedy when others are fearful
  • You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.
  • Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.
  • Stop trying to predict the direction of the stock market, the economy, interest rates, or elections. (or Greece)
  • Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.
  • Lethargy, bordering on sloth should remain the cornerstone of an investment style.
  • Wild swings in share prices have more to do with the "lemming- like" behaviour of institutional investors than with the aggregate returns of the company they own. 
  • Remember that the stock market is manic-depressive
  • As far as you are concerned, the stock market does not exist. Ignore it.


If you struggle in turbulent markets, like those of the past few months, print this last quote off and read it every day. I would also recommend reading it every time you feel like you are getting hijacked by your emotions. 

Your goal as an investor should be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards - so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist temptation to stray from your guidelines: If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes.

So do you practice what Buffett preaches or do you just agree intellectually? It is a natural human tendency to ignore flagrant inconsistencies between what we profess to believe and what our actual behavior implies. Being intellectually honest is difficult. Our egocentric tendencies make ourselves the easiest person to fool. 

Perhaps you have the business valuation side down and struggle with the temperament side of investing. By constantly reminding yourself of the concepts above and using a checklist you can avoid a lot of pitfalls in your investing.


Happy Remembrance Day,

Kevin Graham


Disclosure - Long BRK.b

P.S. If you are Canadian, I would encourage you to reflect on the 110,000 people who laid down their life so we can enjoy the freedom we enjoy today.

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