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How Warren Buffet Approaches Market Volatility

How Warren Buffet Approaches Market Volatility

| January 02, 2019

Warren Buffett, widely considered the world’s greatest investor wrote about the manic-depressive Mr. Market in his 1987 letter to shareholders. I think it’s timely to forward this along as volatility has been crazy lately. We’ve seen this craziness before as Buffett wrote this letter over 30 years ago and was taught to him by his professor and mentor Ben Graham at Columbia University. Please feel free to reach out if you have any questions or concerns.

 

The Story of Mr. Market

By Warren Buffett

 

Ben Graham, my friend and teacher, long ago described the mental attitude

toward market fluctuations that I believe to be most conducive to investment

success. He said that you should imagine market quotations as coming from a

remarkably accommodating fellow named Mr. Market who is your partner in a

private business. Without fail, Mr. Market appears daily and names a price at

which he will either buy your interest or sell you his.

 

Even though the business that the two of you own may have economic

characteristics that are stable, Mr. Market's quotations will be anything but. For,

sad to say, the poor fellow has incurable emotional problems. At times he feels

euphoric and can see only the favorable factors affecting the business. When in

that mood, he names a very high buy-sell price because he fears that you will

snap up his interest and rob him of imminent gains. At other times he is

depressed and can see nothing but trouble ahead for both the business and the

world. On these occasions he will name a very low price, since he is terrified that

you will unload your interest on him. Mr. Market has another endearing

characteristic: He doesn't mind being ignored. If his quotation is uninteresting to

you today, he will be back with a new one tomorrow. Transactions are strictly at

your option. Under these conditions, the more manic-depressive his behavior,

the better for you.

 

But, like Cinderella at the ball, you must heed one warning or everything will turn

into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is

his pocketbook, not his wisdom, that you will find useful. If he shows up some

day in a particularly foolish mood, you are free to either ignore him or to take

advantage of him, but it will be disastrous if you fall under his influence. Indeed,

if you aren't certain that you understand and can value your business far better

than Mr. Market, you don't belong in the game. As they say in poker, "If you've

been in the game 30 minutes and you don't know who the patsy is, you're the

patsy."

 

Source: 1987 Berkshire Hathaway Letter

Peter Livingston may be reached at (704) 658-9190 or peter.livingston@lpl.com.

Peterlivingston.com


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