A friend gave me a copy of Lawrence Cunnigham’s book on “The Essays of Warren Buffet – Lessons for Corporate America” I found a short quiz in that interesting.
Begin Quote
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 a car 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 years to come they get elated when stock prices rise and depressed when they fall.
End Quote
I feel quite good with the rapid rise of the stock market in India but the comment above has made me think that it will be quite okay even if the market has a steep correction.
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Provided you wait to buy AFTER the correction. The hidden message in that quote is the patience required for value buying. Buffet only buys when a stock is well below it intrinsic value, aka margin of safety.
Steep market wide corrections are excellent for cherry picking – but corrections are one thing, and bear markets another. Corrections are down blips in an overall uptrend, and bear markets are an overall downtrend. You don’t want to be in a downtrend, regardless of whether you can save money or not. Simply because bear markets can last a long time – even 10 years. And you may need that money within that time.
Remember that both corrections and bear markets have low prices. So in the beginning they are indistinguishable. In India I don’t think there is a bear market this year – in fact, last year, in June 06, with a big lump in my throat I invested money into the market. Money I had kept saved for some time earlier for lack of investible opportunities. Why I was concerned during that investment was because of a looming bear hug, and that prices would move further down. Already, prices of shares were excitingly low.
Luckily that market turned around. Will the next blip start the bears? I don’t know, but I sure don’t think so.
Buffets comment comes from one who’s sitting on phenomenal profits. In some stocks, so am I, so much that I won’t feel a pinch if the price went to zero. But in other investments, I want the market to be buoyant, so I can pyramid my investments with some confidence. How I’ll handle a bear market is to take a holiday, and come back when there are real signs of revival, but at least I’ll come back. I think most investors will not.
I write in my blog (http://theinvestorblog.blogspot.com/) about how I see the lack of exuberance as a factor for no serious corrections. Cash is still sitting on the sidelines waiting for a downturn – and that by itself negates the possibility of a serious correction. It is because we want it that it will not happen.
“If you expect to be a net saver during the next five years, ” goes on to reflect that the peron is a “saver-kind” thus he has no intention of “investing” in the shares. so its harldly gona matter to him if the markets go up or down.
“Even though they are going to be net buyers of stocks for years to come they get elated when stock prices rise and depressed when they fall.” it is becouse people feel rich when prices of their “buy” goes up and vice-versa. And if they feel rich they dont mind much paying extra bucks if prices go north.
The words ” If you expect to be a net saver” – was quite a leading statement itself. Warren Buffet is a renowned “value investor” ( as opposed to a “momentum player” ) and would invest only if the stocks are available at reasonable valuations. After a prolonged bull run ( like the one we had), the overheated market would leave fewer cherries to be picked even for a trained pro like Mr.Buffet. Hence it’s quite logical for him to expect the price charts to form lower bottoms so that savers see value.
The first two questions (and the implicit answers) were prompting us to answer the final one correctly, though with an incorrect analogy. The incorrectness is in the fact that investments are not commodities. But then again, the quiz wanted to drive home the simple point about markets, which it successfully did.