Stock market legend Warren Buffett may be quietly taking a well-deserved backseat at Berkshire Hathaway these days, but his investing wisdom still speaks volumes. Buffett memes, video clips, and quotes are all over the internet and social media.
Asking me to name my favourite Buffett quote is like asking a chef to pick a favourite ingredient. But if I had to list my top three, this would be it:
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“Be fearful when others are greedy, and greedy when others are fearful.”
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“Only when the tide goes out do you discover who’s been swimming naked.”
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“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”
Reading these simple words and thinking deeply about what they mean can make us all better investors. Both in terms of making money and not losing a lot of it.
The stock market is the world’s strangest store
However, the quote I’m referring to in the title is this one: “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?”
Buffett says the question answers itself. Yet most people act differently in the stock market. When prices rise a lot, they become elated, and when prices tank, they get depressed.
But that’s the wrong way round for a net buyer of stocks. Or put another way, the stock market is the only place where people dash out of the shop when everything goes on sale.
Why is that? I mean, when I go to Tesco and see my favorite coffee brand marked down from £6.50 to £4, I don’t panic. I don’t think, “oh no, the value of coffee is collapsing, I must throw all my jars in the bin at home” and don’t run out of the store.
Instead, I probably just pop a jar in my basket to take advantage of the sale.
Buying at a lower price
Of course, this is not entirely an apples-to-apples comparison because a stock may deserve to suddenly have a lower share price. The firm may be losing its competitive position, for example, or facing some catastrophic regulatory change.
But assuming all else is equal, quality merchandise trading at lower prices should get investors more interested, not less.
Let me give a recent example. I own shares of 3i Group (LSE:III), a private equity firm from the FTSE 100. It has a tremendous track record of buying stakes in businesses and helping them grow before realising a profit.
Earlier this month, 3i nosedived because its top holding Action (the Dutch discount retailer) reported slowing growth. And because 3i had applied a certain valuation multiple to its (unlisted) investment, the market essentially marked one down through the other. A further slowdown in growth is a risk.
