The only certainty in the stock market is uncertainty
For the market volatility, I believe most of you have heard a story. A young man stopped the founder of the famous Wall Street financial giant J. P. Morgan Bank, John Morgan, asked Morgan: “What do you think the stock market will change next.” Morgan replied, “The market will fluctuate.”
Mr. Market
In his famous book, “The Intelligent Stock Investor“, Graham made a point: For smart investors, the randomness of stock prices is a good thing, not a bad thing. Best known for his use of the metaphor of a “Mr. Market” who randomly buys and sells every day.
Buffett’s baseball analogy is more apt: “I call investing the greatest business in the world,” he says, “because you never have to swing.” You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! And nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.”
The assumptions of financial theory are unreasonable
Both Buffett and Simmons disdain systems based on “Efficient Market Hypothesis” or “Why Modern Portfolio Theory“, capital asset pricing models (CAPM), or even major financial theories. But most importantly, they proved that they succeeded, and long-term success.
If “Efficient Markets” or “Modern Portfolio Theory”, the Capital Asset Pricing Model really works, it means that the investment success of Buffett and Simmons is impossible.
Look for opportunities in bad times
Because Buffett believes in “volatility is the investor’s friend”, rather than blindly avoiding risk as these financial theories advocate, this is the biggest difference between theory and practice. Frank Knight once said that “extreme uncertainty brings opportunities for profit,” and the enormous wealth these people have amassed proves him right.
Buffett also mentioned in his 1997 shareholder letter: “In the summer of 1979, when equities looked cheap to me, I wrote a Forbes article entitled “You pay a very high price in the stock market for a cheery consensus.” At that time skepticism and disappointment prevailed, and my point was that investors should be glad of the fact, since pessimism drives down prices to truly attractive levels.”
Buffett himself said something similar: “Market volatility provides investors with buying opportunities.” As Buffett wrote in the New York Times in 2008, “Bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.”
This is why in Buffett’s 2016 annual letter to shareholders. He said “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’simperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.”
“During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy, it will also be unwarranted.”
Long-term investment to win
Buffett also mentioned in his 2016 shareholder letter “Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.”
He also wrote in the New York Times in 2008 that “Fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records five, 10 and 20 years from now.”
Recession will end eventually
When the National Institute of Economic Research announced that the recession had ended in June 2009, Buffett said in a interview with CNBC in 2010: “We’re not out of the recession, we’re going to be in it for a while, but we’re going to get out of it.” Buffett’s definition of “recession end” is a return to pre-recession levels of real gross domestic product (GDP) per capita.
You should be happy when market crashes
Buffett wrote in 1996 shareholder letter, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” and “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.“
Buffett wrote in 1997 shareholder letter, “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.“
Unless you want to sell stocks tomorrow, the stock price doesn’t mean much to you. why? Because the deeper the decline, the higher the margin of safety of the stock, and the lower the probability of losing a lot of money in investment, which is easy to understand. This is why Buffett wrote in his 2004 shareholder letter: “Be fearful when others are greedy, and be greedy when others are fearful.“
Related articles
- “How to deal with market crash or sharp pullback?“
- “Does the stock market fall deep enough?“
- “Why is portfolio rebalancing unreasonable“
- “Any strong reason to buy mutual fund?“
- “The uncertainty in investment“
- “Efficient market Hypothesis (EMH)“
- “Why Modern Portfolio Theory Unreasonable?“
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