The Rational Investor #011: Buffett on How to Think about Market Fluctuations
Happy Saturday to you,
Welcome to the 11th edition of The Rational Investor Newsletter.
Today’s quote comes from Warren Buffett’s 1997 Berkshire Hathaway Letter to Shareholders. I’d argue that today’s topic is THE most misunderstood aspect of investing. Or at a minimum, it’s almost certainly the most difficult idea for investors to make peace with.
Onto the main event…
Here’s Buffett on How to Think about Market Fluctuations:
A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?
Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?
These questions, of course, answer themselves.
But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?
Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.
The aphorism I created a few years ago to align with this philosophy is, “Bad years for returns are great years for investing.” My hope was to offer something repeatable that might act as an encouragement for accumulators to keep buying when the media is telling everyone to “Sell, sell, sell!”
As we sit here today though, the market has nearly returned to all-time highs and investors of all ages are cheering the market’s return thinking that this is good for them. For accumulators, it’s not.
I do understand the psychological hang-ups that must be overcome to be excited about falling prices, but the fact remains that we get more for our money when prices are lower. As uncomfortable as that fact may be, it is inarguable.
Buffet has said before, “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
As long-term investors, we should take note.
Thanks for reading. I’ll be back again next week with more timeless wisdom from great investors.
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