Warren Buffett: Inspired by Ben Graham: How I Learned to Love Falling Stock Prices

Johnny HopkinsStock ScreenerLeave a Comment

In his 2011 Berkshire Hathaway Annual Letter, Warren Buffett explained why investors who plan to buy stocks in the future should welcome falling stock prices (swoons) because it allows them to buy at a discount.

However, most people feel happy when stock prices rise, even if they are net buyers. This is a bad investment strategy. Buffett acknowledges he used to feel this way too, but learned from reading Benjamin Graham’s book to see falling prices as an opportunity. Here’s an excerpt from the letter:

The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise.

You benefit when stocks swoon.

Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance.

These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply.

Charlie and I don’t expect to win many of you over to our way of thinking — we’ve observed enough human behavior to know the futility of that — but we do want you to be aware of our personal calculus.

And here a confession is in order: In my early days I, too, rejoiced when the market rose. Then I read Chapter Eight of Ben Graham’s The Intelligent Investor, the chapter dealing with how investors should view fluctuations in stock prices.

Immediately the scales fell from my eyes, and low prices became my friend. Picking up that book was one of the luckiest moments in my life.

You can read the entire letter here:

Berkshire Hathaway 2011 Annual Letter

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