Warren Buffett: 'We Don't Have Any Fear at All'
- By Rupert Hargreaves
Financial news outlet CNBC ran an article on Monday titled "Warren Buffett explains why he doesn't fear stock market sell-offs but welcomes them instead."
The focal point of the piece is a statement Warren Buffett (Trades, Portfolio) issued at the 1994 annual meeting of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) shareholders. Specifically, he said:
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The intrinsic value of BRK.A
"We are going to be buyers of things over time. And if you're going to be buyers of groceries over time, you like grocery prices to go down. If you're going to be buying cars over time, you like car prices to go down. We buy businesses. We buy pieces of businesses: stocks. And we're going to be much better off if we can buy those things at an attractive price than if we can't."
He went on to say:
"So we don't have any fear at all...I mean, what we fear is an irrational bull market that's sustained for some long period of time."
I think this second quote is much more important and telling than the first. It is all very well and good to say you like to buy stocks when they are cheap, but this does not mean you can easily stomach market declines.
The key to investing success
To be a successful investor, you have to be able to navigate all sorts of market environments, from drawdowns of 50% or more to market rallies.
Psychological research, however, has shown humans feel losses twice as bad as gains. To put it another way, they would be more upset making a loss of $5,000 then they would be happy after making a gain of $5,000.
To illustrate the point further, to make up for a loss of $5,000, most investors would have to make a profit of $10,000.
It is all very well and good to say you like to buy cheap stocks, but will you be able to pull the trigger after the market has fallen 50% to buy more? Most investors would be afraid to do so, fearing further declines, and would rather protect their capital.
This is the real takeaway from Buffett's advice. Every investor knows the way to make money in the stock market is to buy low and sell high, but research tells us most investors do precisely the opposite because they are afraid of losing money and panic when they should be keeping a cool head.
Eight decades of experience in investing has taught the Oracle of Omaha not to panic and stay calm in all market environments.
That's why he says he feels nothing. He knows that over the long term, stocks will always head higher.
Building the right mentality
It is difficult to acquire this kind of attitude. You need two things: experience and research.
The best way to reduce risk in any portfolio is to know your companies inside and out, that way you won't be panicked when the market falls 50%. Experience is a lot harder to gain; it only comes over time, but if you do your research, you should be able to remain afloat long enough to build the experience to be a good investor.
So the primary takeaway from the quotes above is it is not enough to buy cheap stocks; you have to be prepared to withstand market declines whenever they arrive and learn not to fear, but to respect, the market and the opportunities it presents.
Everyone knows how to buy cheap stocks, but not everyone has the mentality required to be a successful investor over the long term. It requires patience and a contrarian attitude.
Disclosure: The author owns shares of Berkshire Hathaway.
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This article first appeared on GuruFocus.
Warning! GuruFocus has detected 2 Warning Sign with BRK.A. Click here to check it out.
The intrinsic value of BRK.A
