The stock market is a place just loaded with the twin stresses of fear and

The stock market is a place just loaded with the twin

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The stock market is a place just loaded with the twin stresses of fear and greed, so much so that we can conjure up a bipolar character whom Ben Graham named “Mr. Market.” Mr. Market is usually rational, but then again, he’s usually taking his meds. When events in the world happen that Mr. Market didn’t expect, he stops taking his medication and gets into a bipolar episode. If the news is unexpectedly good, he’ll get manic and be so full of enthusiasm for the future that he’ll pay exceptionally high prices for stocks—prices far above their value. On the other hand, if the news is unexpectedly bad, he gets so depressed that he’ll sell wonderful businesses at prices far below their value. The beauty of Mr. Market is that he’ll act as our partner no matter what mood he’s in. If he’s depressed, he’ll sell us everything we want at fabulously low prices. If he’s manic, he’ll buy anything we want to sell him at fabulously high prices. He’s a great partner as long as we learn to take advantage of his moods—and not be swayed by them. If he’s full of fear, it’s time for us to be looking for deals. If he’s full of greed, it’s time for us to be thinking about selling him businesses we own. We have to remain rational while Mr. Market is acting like an emotional prima donna. A rational reaction in this market meltdown, one that eliminates emotion, is to see whether the value of what we own is significantly higher than its price. If it is, then a rational reaction would be to buy more even if we expect the price might go even lower in the near term. That’s exactly how you take advantage of the system that failed you and guarantee your financial future. If we own something with $10 of value that’s selling for $5 now, why not buy more, even if two months from now the price is $4? If it’s really worth $10, then we’re still buying $10 bills for half off. And if a panicked Mr. Market is selling the $10 bill for $4 in a couple of months, say thank you and buy more of them at that
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price. Someday we’re going to be able to sell the $10s back to Mr. Market for $10 or more. It won’t matter a great deal whether we paid $5 or $4. We made a killing either way. This is rational investing. This, as you know by now, is stockpiling . Most big investors talk a lot about “value” but they don’t back up their talk with action. If a stock is going down, instead of being excited by the possibility of buying more on sale, the mutual fund manager doesn’t really think much about the value of the stock. He thinks, “Why is the price going down? There must be a problem I don’t understand. Time to run away.” This is Efficient Market Theory (EMT) speaking and, since the theory is BS, when things start to go down, the fund managers panic —often for no good reason. EFFICIENT MARKET THEORY The quickie on EMT: Efficient Market Theory basically states that since all the information about stocks is widely known to investors, and since investors act rationally in their own interest, the price of any widely traded stock reflects everything known about it and, therefore, the current price is the current value of the stock. In other
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  • Spring '20
  • Warren Buffett

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