“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” — Warren Buffett
What’s the difference between you and one of the richest men in the world, besides all that money, of course? Warren Buffett, the multi-billionaire head of holding company Berkshire Hathaway, would explain it simply: He doesn’t buy stocks. He buys businesses.
Buffett vastly prefers to own an investment whose fundamental value as a business is likely to increase, regardless of which direction the share price might go day-to-day. You might think share price and value are the same, but they are not. As Buffett’s mentor Ben Graham pointed out, the stock market in the short run is a voting machine, but in the long run it is a weighing machine.
In simple terms, if you do not feel certain about the prospects of a business 10 years out, you must accept the idea that you are not investing but speculating on unknowns, and you must accept the risks implied by that choice. That’s why Buffett famously does not invest in tech start-ups: An idea, however fascinating in terms of its potential, is not the same as a viable business. It’s far easier, and more profitable, to analyze existing businesses with real earnings and wait for the short-term thinkers in the market to hand you an astounding entry price — something which happens with striking regularity.
Analyzing a long-term opportunity sounds easy, but it’s not. It’s math. It’s legwork and phone calls. It’s patience and, sometimes, a willingness to do nothing for long periods of time. Meanwhile, the financial media is action, action, action! It exists to churn up eyeballs for advertisers, and that’s about all.
Along the way, the media creates other problems: It often suggests that there are strong causal connections, or at least plausible correlations, between movements of individual asset prices and the economy at large. By default, media reporting makes this connection quite directly, with breathless updates of market movements that cite “European caution” or “Federal Reserve statements” as reasons why stocks have broadly risen or fallen in short periods.
The truth is, stock prices in the aggregate are a fitful fever dream, an argument between thousands of unrelated actors over perceived value that no one will settle by the time the market bell rings to a close, only to take up the same, useless discussion hours later, when markets reopen. Your watching CNBC all day will not change a thing about how the masses of investors will treat your positions. The only effect will be on you and your own choices in that trading day, almost certainly to your detriment.
In Part 2, we’ll take a deeper look at how investors overreact to financial news and provide some useful tips to master the media noise.