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Buffett Principles: Don't Time the Market

Value investor with a deep passion for understanding and a desire to improve results over time.

Warren Buffett

Warren Buffett

Investing Through Thick and Thin

Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.

This single sentence, from Warren Buffett's 2008 letter to shareholders of Berkshire Hathaway, sums value investing up neatly. Here, Buffett explains that stocks are generally better buys when they're on sale, just like anything else you might be interested in buying.

But if a market is crashing, it can make pulling the trigger much, much more difficult. Imagine walking into a discount store where they're selling some really nice coffee for 25% off of retail. Today, the owner drops the price down to 50% off, and then tomorrow, it's 60% off.

Do you buy today, or do you wait for tomorrow? After all, you might get an even better deal by waiting . . . but all of the coffee might be sold out, and you're not sure if the proprietor will lower or raise the price. That's not such an easy question to answer, but understanding your own strategy is incredibly important.

Aesop's Investment Advice

Don’t pass up something that’s attractive today because you think you will find something better tomorrow.

Buffett conducted an interview at his alma mater, Columbia University, in 2009, where he dropped this most Aesop-like quote. Once again, he cuts straight to the heart of the matter: the idea is to determine what you think the intrinsic value of a business is and then to buy when the stock is trading at a sufficient discount. In Aesop's apocryphal words, a bird in the hand is worth two in the bush.

In our "crazy store owner" example, if you think that the bag of coffee you want to buy is worth a lot more to you than what it's selling for, you should buy it, period.

However, there are two additional Buffett Principles we need to keep in mind before pulling the trigger. First, to paraphrase the Oracle himself, it's pretty dumb to buy that bag of coffee if you can't pay your water bill. As usual, Buffett puts it eloquently:

Never risk what you have and need, for what you don’t have and don’t need.

The second principle is, of course, margin of safety. If you were pretty sure (but not completely convinced) that the coffee was a good bargain at 50%, you could think of that extra 10% as your margin of safety.

Just Buy It

Just buy something for less than it’s worth.

In this lecture at Notre Dame in 1991, Buffett is at his pithy best. Here, he reminds us to keep our eye on the proverbial ball, not losing sight of how investments work out well for us. The stock market universe is a messy place, with seemingly infinite information about companies, economic conditions, geopolitics, and other macro and technical considerations. It's easy to get overwhelmed by this deluge of data, and it can be tough to determine what's meaningful and what's nonsense.

Warren Buffett cuts straight through the noise and reminds us that we need to determine what we think a business is worth, divide that by the number of shares, and buy only on that basis. And, that's it.


Beware Voting Machines

As Ben Graham said: “In the short-run, the market is a voting machine — reflecting a voter-registration test that requires only money, not intelligence or emotional stability — but in the long-run, the market is a weighing machine.”

Buffett was fond of quoting his mentor, Ben Graham, as he did here in another letter to shareholders. This nugget of wisdom reinforces the idea of buying what's on sale today, not waiting for a better possible bargain tomorrow. Be careful of falling knives, but keep in mind that persistent, steady buying is the answer. The intrinsic value might not matter one whit over the next few days, so you simply can't bank on a meaningful discount in the near future.

Markets seem to have minds of their own, and movements are impossible for us to predict. However, over time, the earnings of a company almost always correspond with its stock price, even if that reconciliation can take a very, very long time.

Keep this in mind the next time a stock you're following falls into your buying range. Think about at least buying a sliver now, instead of waiting for a bottom. After all, you might not get that opportunity again.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2022 Andrew Smith