high rate of return but they had high hopes that his fear would not go away

High rate of return but they had high hopes that his

This preview shows page 208 - 211 out of 263 pages.

high rate of return, but they had high hopes that his fear would not go away anytime soon. The economy was showing no sign of improving. President Obama signed a $781 billion bailout bill on top of the $700 billion President Bush gave away, but banks still weren’t lending. Home prices were still dropping. Congress was in the mood to regulate everything. Labor unions were in line to see pay raises and restrictive tariffs. China was getting worried about lending to the United States. In other words, from the point of view of Rule #1 Stockpilers like Doug and Susan, 2009 was the opportunity of a lifetime to make a fortune. While they certainly couldn’t count on Mr. Market continuing to
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want to sell wonderful businesses at fire-sale prices forever, they could certainly see that between Rule #1 trading and Rule #1 stockpiling, they were going to easily achieve their goal of retiring comfortably. It was one thing for them to feel pretty good after turning $20,000 into $78,000 while the market was going up. Taking $78,000 to $275,000 in three years while the market went down gave them a whole different level of confidence. They were happy owning small pieces of wonderful businesses and planned on hanging on to them tenaciously. Someday way off in the distant future they might consider selling their piece of Chipotle and Buffalo Wild Wings, but for now they were planning on continuing to stockpile these and other wonderful businesses every chance Mr. Market gave them. ELIMINATING THE FEAR FACTOR By every financial measurement—percentage return, compounded return, total dollar return—you are better off stockpiling. And by the most important measurement of investment success, your fear factor, you are in another universe by stockpiling. You eliminate fear completely. Let’s look at this Chipotle example. Remember when Doug and Susan were hoping the stock price would break through the $49 Floor and go to $42? They owned a bunch of CMG stock but they still were hoping the price would go down. When it did, they weren’t worried—they were excited. Now let’s look at this same situation from a different perspective. One investor, someone who didn’t know anything about stockpiling, had $100,000 to invest and an additional $100,000 in six months from the sale of a house. In December 2007 he bought $100,000 worth of CMG at $150 per share. He then owned 666 shares. That should tell you something right there. And sure enough, a year later the price of CMG dropped with a precipitous stock market decline to $42. This investor became fearful and depressed. He assumed the value of CMG was the same as the price, so when it dropped from $150 to $42 he was shocked at the significant loss of value. Down 72 percent was a lot. It had to go up 350 percent in price
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just so he could break even. If he sold now, he’d lock in the $72,000 loss but he thought, “What if I sell and it comes back?” So part of him was afraid to sell. On the other hand, he was thinking, “If I keep the CMG shares I could lose another $15,000. Who knows in this crazy world?
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  • Spring '20
  • Warren Buffett

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