Monday, June 29, 2009

On Bear Markets

From an article on investing when markets are in turmoil:

In his 1961 letter to partners, a 31-year-old investor in Omaha named Warren Buffett told his partners that they should be judging him during times of turmoil and not times of jubilance. "I would consider a year in which we declined 15% and the [Dow Jones Industrial] Average 30%, to be much superior to a year when both we and the Average advanced 20%." Very early on in his career, Buffett was aware that performing well during market turmoil was the key to long-term success as an investor.

It is during bear markets -- when the economic environment is most challenging -- when the real money usually gets made. That's when the biggest discounts to value become available even if buying doesn't feel great at the time. The shares of a good businesses that might, in fact, be cheap (i.e. price is nicely below a conservative estimate of per share intrinsic value) will often go on to become temporarily even cheaper.

So near term price action must be ignored. The focus should be on buying shares of quality businesses at a discount -- on long-term effects and outcomes. Trying to buy at the bottom is futile. Attempts at avoiding the inevitable temporary paper losses generally just leads to missed opportunities.

Adam

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