In this television interview, Warren Buffett explained that most professional investors focus on short-term stock price movements rather than viewing stocks as ownership in a business.
True value investing means not being concerned about whether the stock market is open tomorrow. A good investment should hold its worth even if the market closes for years.
Stock prices are merely indicators and do not reveal a business’s true value, which is determined by its fundamentals. The ideal approach is to evaluate a stock or business independently of its price, establish its intrinsic value, and then compare it to the market price to identify potential investment opportunities.
Here’s an excerpt from the interview:
Most professional investors focus on what the stock is likely to do in the next year, using all kinds of arcane methods to approach that, but they do not really think of themselves as owning a piece of a business. The real test of whether you’re investing from a value standpoint or not is whether you care if the stock market is open tomorrow.
If you’re making a good investment in a security, it shouldn’t bother you if they close down the stock market for five years. All the ticker tells me is the price, and I can look at the price occasionally to see whether the price isn’t outlandish.
But prices don’t tell me anything about a business. Business figures themselves tell me something about a business, but the price of a stock doesn’t tell me anything about a business.
I would rather value a stock or a business first and not even know the price, so that I’m not influenced by the price in establishing my valuation, and then look at the price later to see whether it’s way out of line with what my value is.
You can watch the entire interview here:
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