Yesterday was an extremely volatile day at the markets, and while I often remind myself that it is the nature of markets to surprise you, I can never fully take that advice myself, and am always surprised by some of these crazy movements.
I don’t think there was a single person who could have predicted the 400 point up-move that took place yesterday, and while surprising in its own right, it is no more surprising than what the market has consistently done since it existed.
I’m currently reading all of Warren Buffett’s letters to shareholders in a sequence, and I just happened to read the ’87 letter today, which had this great bit of advice about fluctuations in it.
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."
I’ve been buying stocks myself during the past few days and will continue to buy them in the coming days and add more with every little crash, and it is useful to keep these things in mind.
This is a useful reminder as the most recent quarterly results are not exactly sanguine but not very depressing either. If I can hold on to my shares for a very long period of time, then if nothing else, inflation would help boost nominal values.