It is a pleasure to read Warren Buffet’s letters to his shareholders; these letters contain information about how the company is doing and his ideas about economy and investing principles in general. They are a wealth of knowledge and Buffet is a very witty writer so they make fun reading too.
In his 1997 letter he takes an interesting analogy to explain common investor reaction to market fluctuations and we are going to take a look at that here.
Buffet asks that if you plan to eat hamburgers throughout your life, but are not a hamburger producer then will you hope for higher or lower prices?
Similarly if you are going to buy cars frequently but are not a car manufacturer, will you prefer higher or lower prices?
Most investors will find the answer to the two questions above very easy, they know that they will definitely prefer lower prices.
However this same outlook is somehow not applied, when it comes to investing. Take a look for yourself by answering the next question.
If you are going to be a net saver for the next five years, will you hope for higher or lower stock prices?
Most investors get this one wrong; it is very hard to find an investor who doesn’t get depressed when stock prices go down. Despite the fact that they will be net buyers of securities for many years to come investors get really jittery when stock markets go down. The natural investor reaction is to be depressed when stock prices are depressed and be elated when stock prices are on a high. Even if it means that they are going to buy the same stocks at a higher price now. Or to continue the earlier example, people rejoice when the price of the hamburgers they are going to purchase goes up and get depressed when the price of the hamburgers they are going to purchase goes down.
In times when the markets are down there are plenty of bargains for investors and they shouldn’t panic but instead make long term investments in good companies with solid fundamentals that have performed well and are available at bargain prices.
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