Lessons from Warren Buffett

Have you ever wondered, "Why is it that whenever departmental or
garment stores announce their yearly sales, people flock to these
places and purchase goods by the truckloads but the very same people
will not put a dime when similar situation plays itself out in the
stock market." Indeed, whenever one is confident of the future
direction of the economy, like we currently are of India, corrections
of big magnitudes in the stock market can be viewed as an excellent
buying opportunity. This is because just as in the case of
departmental or grocery stores, a large number of stocks are available
at 'sale' during these corrections and hence, one should not let go of
such opportunities without making huge purchases. This is exactly what
the master has to say through some of the comments in his 1997 letter
to shareholders that we have reproduced below.

"A short quiz: 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? Likewise, if you are going to buy a car from time to time
but are not an auto manufacturer, should you prefer higher or lower
car prices? These questions, of course, answer themselves."

"But now for the final exam: If you expect to be a net saver during
the next five years, should you hope for a higher or lower stock
market during that period? Many investors get this one wrong. Even
though they are going to be net buyers of stocks for many years to
come, they are elated when stock prices rise and depressed when they
fall. In effect, they rejoice because prices have risen for the
"hamburgers" they will soon be buying. This reaction makes no sense.
Only those who will be sellers of equities in the near future should
be happy at seeing stocks rise. Prospective purchasers should much
prefer sinking prices."

Simple isn't it! If someone is expected to be a buyer of certain goods
over the course of the next few years, he or she will definitely be
elated if prices of the goods fall. So why have a different attitude
while making stock purchases. Having such frames of reference in mind
helps one avoid the herd mentality and make rational decisions. Hence,
the next time the stock market undergoes a big correction; think of it
as one of those sales where good quality stocks are available at
attractive prices and then it will certainly be difficult for you to
not to make an investment decision.

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