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Withstanding market volatility

Warren Buffett explains why market volatility is good for long-term investors


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The market has caused a lot of heart pain in the recent days. Many emerging large caps have once again become mid caps and many mid caps have turned into small caps. In these tough days, it pays to heed the advice of the world's best investor. Read about how Buffett thinks of markets and what he does in volatile times.

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The stock doesn't know you own it
How often is it that a stock nosedives just after you have bought it or the markets start falling right after you buy a large position in a stock? This is the reality of investing. Stocks will go down after you purchase them and up after you sell. The trick is not to get too bothered about these fluctuations, rather accept them as inevitable.

Says Buffett, 'I have no idea where the market is going to go. I prefer it going down. But my preferences have nothing to do with it. The market knows nothing about my feelings. That is one of the first things you have to learn about a stock. You buy 100 shares of General Motors (GM). Now all of a sudden you have this feeling about GM. It goes down, you may be mad at it. You may say, 'Well, if it just goes up for what I paid for it, my life will be wonderful again'. Or if it goes up, you may say how smart you were and how you and GM have this love affair. You have got all these feelings. The stock doesn't know you own it. The stock just sits there; it doesn't care what you paid or the fact that you own it.'

Why you should root for a lower market?
The fall in markets in the recent days has caused many heartburns. While it may have caused a dent in your portfolio, think about how prices have come down for many stocks. This is not to say that current prices are close to the fair value of stocks but that the frothy enthusiasm has been cut out. Many IPOs, for instance, that saw their stocks being oversubscribed many times over are now available much cheaper absent the enthusiasm around them. Many good-quality mid caps are now available reasonably cheaper today than they were in a long time.

Here's Buffett explaining why you should root for a lower market. 'Practically anybody in this room is probably more likely to be a net buyer of stocks over the next ten years than they are a net seller, so everyone of you should prefer lower prices. If you are a net eater of hamburger over the next ten years, you want hamburger to go down unless you are a cattle producer. If you are going to be a buyer of Coca-Cola and you don't own Coke stock, you hope the price of Coke goes down. You are looking for it to be on sale this weekend at your supermarket. You want it to be down on the weekends not up on the weekends when you tend the supermarket.

The NYSE is one big supermarket of companies. And if you are going to be buying stocks, what you want to have happen? You want to have those stocks go down, way down; you will make better buys then. Later on twenty or thirty years from now when you are in a period when you are dis-saving, or when your heirs dis-save for you, then you may care about higher prices.'

Where does this come from?
Buffett's deep-rooted desire for a lower market is a lesson he learnt early in his career, picking it up from his teacher Benjamin Graham. Here he's talking about what converted him to root for lower stock prices. 'There is Chapter 8 in Graham's Intelligent Investor about the attitude toward stock market fluctuations, that and Chapter 20 on the Margin of Safety are the two most important essays ever written on investing as far as I am concerned. Because when I read Chapter 8 when I was 19, I figured out what I just said was obvious, but I didn't figure it out myself. It was explained to me. I probably would have gone another 100 years and still thought it was good when my stocks were going up. We want things to go down, but I have no idea what the stock market is going to do. I never do and I never will. It is not something I think about at all. When it goes down, I look harder at what I might buy that day because I know there is more likely to be some merchandise there to use my money effectively in.'

You should not look for market forecasts
Many investors search for the trend of the markets before buying or selling stocks. There are many 'television gurus' that profess to tell where the markets are likely to head. In reality, no market expert ever knows in which direction the markets will move. You would do much better if you ignore what these experts say.

Here's Buffett on these market experts. 'People have always had this craving to have someone tell them the future. Long ago, kings would hire people to read sheep guts. There's always been a market for people who pretend to know the future. Listening to today's forecasters is just as crazy as when the king hired the guy to look at the sheep guts. It happens over and over and over.'

What you should do then?
Heed Buffett's advice on market movements, 'Charlie and I haven't the faintest idea where it goes next week, next month or next year. We are not in that business. It isn't our game. We see thousands of companies priced every day. We ignore 99% of what we see. Every now and then, we find an attractive price for a business. When we buy it, we would be happy if the market was closed for a few years; you wouldn't get a price quote daily if you owned a farm. We look at expected yield, cost of taxes. If you buy a farm, you would look at the cost of fertilizers, what a farm produces relative to the purchase price, price per acre, production per acre, etc. We make judgements.'

The last word
Buffett says, 'Charlie and I spend no time thinking about where the market's going. We do know when we're getting good value [when we're buying a stock or business]. There are always going to be some good and bad things happening. I've seen more people lose more money by getting focused too much on one factor. We've never bought something due to macroeconomic concerns.'

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