Warren Buffett’s call on Market and His Investment Strategy

January 9, 2014

Warren Buffett’s call on Market and His Investment Strategy

Greetings from Hitesh! Hope you liked the article on Gold and Rupee Rates. Today I am going to share the ultimate knowledge on market and investment strategy from the most respected and most successful investor of our time….Mr.Warren Buffett. 

The article will answer following questions…..

1.   What is the market? 

2.   What are the charactertistics of the market? 

3.   What is the right approach and attitude towards market for successful investment experience? 

4.   When to sell your shares? 

5.   With who to associate and stay associated? 

6.   Whose advice you should not follow? 

Approach towards Stocks and Market:-

Whenever Charlie and I buy common stocks for Berkshire's insurance companies (leaving aside arbitrage purchases, discussed later) we approach the transaction as if we were buying into a private business.  We look at the economic prospects of the business, the people in charge of running it, and the price we must pay.  We do not have in mind any time or price for sale.  Indeed, we are willing to hold a stock indefinitely so long as we expect the business to increase in intrinsic value at a satisfactory rate.  When investing, we view ourselves as business analysts - not as market analysts, not as macroeconomic analysts, and not even as security analysts. 

Our approach makes an active trading market useful, since it periodically presents us with mouth-watering opportunities.  But by no means is it essential: a prolonged suspension of trading in the securities we hold would not bother us any more than does the lack of daily quotations on World Book or Fechheimer.  Eventually, our economic fate will be determined by the economic fate of the business we own, whether our ownership is partial or total. (READ THIS TWICE)

Required Mental Attitude and Characeteristics of Market:-

Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be 

most conducive to investment success.  He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business.  Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his. 

Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market's quotations will be anything but.  For, sad to say, the poor fellow has incurable emotional problems.  At times he feels euphoric and can see only the favorable factors affecting the business.  When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains.  At other times he is depressed and can see nothing but trouble ahead for both the business and the world.  On these occasions he will name a very low price, since he is terrified that you will unload your interest on him. 

Mr.Market has another endearing characteristic: He doesn't mind being ignored.  If his quotation is uninteresting to you today, he will be back with a new one tomorrow.  Transactions are strictly at your option.Under these conditions, the more manic-depressive his behavior, the better for you. 

But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you.  It is his pocketbook, not his wisdom,that you will find useful.  If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence.  Indeed, if you aren't certain that you understand and can value your business far better than Mr. Market, you don't belong in the game.  As they say in poker, "If you've been in the game 30 minutes and you don't know who the patsy is, you're the patsy." 

Ben's Mr. Market allegory may seem out-of-date in today's investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas.  Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice.  After all, what witch doctor has ever achieved fame and fortune by simply advising "Take two aspirins"? (We have always warned you against media and media analysts. Make things simple….do not complicate the same.)

The value of market esoterica to the consumer of investment advice is a different story.  In my opinion, investment success will not be produced by arcane formulae, computer programs or signals flashed by the price behavior of stocks and markets.  Rather an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace.  In my own efforts to stay insulated, I have found it highly useful to keep Ben's Mr. Market concept firmly in mind. (If you do not appreciate our simplicity…..you will surely be the prey of media analysts).

Criteria for Judging Your Success or Failure:-

Following Ben's teachings, Charlie and I let our marketable equities tell us by their operating results - not by their daily, or even yearly, price quotations - whether our investments are successful.  The market may ignore business success for a while, but eventually will confirm it.  As Ben said: "In the short run, the market is a voting machine but in the long run it is a weighing machine." The speed at which a business's success is recognized, furthermore, is not that important as long as the company's intrinsic value is increasing at a satisfactory rate.  In fact, delayed recognition can be an advantage: It may give us the chance to buy more of a good thing at a bargain price. 

When to Sell your Shares?

Sometimes, of course, the market may judge a business to be more valuable than the underlying facts would indicate it is.  In such a case, we will sell our holdings.  Sometimes, also, we will sell a security that is fairly valued or even undervalued because we require funds for a still more undervalued investment or one we believe we understand better. 

We need to emphasize, however, that we do not sell holdings just because they have appreciated or because we have held them for a long time. (Of Wall Street maxims the most foolish may be "You can't go broke taking a profit.") We are quite content to hold any security indefinitely, so long as the prospective return on equity capital of the underlying business is satisfactory, management is competent and honest, and the market does not overvalue the business. 

With Whom To Associate:-

Our attitude, however, fits our personalities and the way we want to live our lives.  Churchill once said, "You shape your houses and then they shape you." We know the manner in which we wish to be shaped.  For that reason, we would rather achieve a return of X while associating with people whom we strongly like and admire than realize 110% of X by exchanging these relationships for uninteresting or unpleasant ones. 

The Best Way to Benefit from the above Wisdom:-

Kindly take the printout of the above. Get it laminated and keep it handy for your daily reading. Read this after your daily prayer for minimum 21 days. I assure you the magic in your investment performance.

My Personal Call:-

This article is taken from 1987 share holder letter written by Mr.Buffett. If you like our simplicity, if you like our approach and if you admire our vision of the market……we are inviting you to be our associate till deaths do us apart.

Do share your feelings.

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Live With Passion…Invest With Passion.

Hitesh Parikh.