Monday, November 28, 2005

Welcome market declines

"[Many] investors who expect to be ongoing buyers of investments throughout their lifetimes... illogically become euphoric when stock prices rise and unhappy when they fall. They show no such confusion in their reaction to food prices: Knowing they are forever going to be buyers of food, they welcome falling prices and deplore price increases. (It's the seller of food who doesn't like declining prices.) Similarly, at the Buffalo News we would cheer lower prices for newsprint -- even though it would mean marking down the value of the large inventory of newsprint we always keep on hand -- because we know we are going to be perpetually buying the product.

"Identical reasoning guides our thinking about Berkshire's investments. We will be buying businesses -- or small parts of businesses, called stocks -- year in, year out as long as I live (and longer, if Berkshire's directors attend the seances I have scheduled). Given these intentions, declining prices for businesses benefit us, and rising prices hurt us.

"The most common cause of low prices is pessimism -- some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer.

"None of this means, however, that a business or stock is an intelligent purchase simply because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd strategy. What's required is thinking rather than polling. Unfortunately, Bertrand Russell's observation about life in general applies with unusual force in the financial world: 'Most men would rather die than think. Many do.'"

-- 1990 Shareholder Letter

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