Don’t follow Market’s mood, explore it

Today, after the $700 billion rescue plan was voted down, the market got hammered. On an investing discussion board, I stated “If you have cash, be prepared. You could find some great opportunities in this chaos.” Immediately, I got a response: “Why we still have this kind of crazy people who are not afraid of being killed?”

When market goes south, many people go with it and get depressed. But investing is about buy low and sell high. After market goes down, it’s at least a better deal than yesterday if you already want to buy. We understand this when shopping for grocery. But when come to investing, most people forget this basic idea. People tend to follow the market’s emotion. When market goes up, people are happy and want to buy more stocks. But after seeing the market goes down, people get pessimistic and depressed. Instead of buying stocks at a cheaper price, they want sell. This accelerated market’s decline and created an even better deal for those investors who have the right temperament. These investors have the discipline to stick to their belief. They followed some great companies and have an idea what those values are. Then they patiently wait for the right opportunities. In the crisis like what we have today, they know some of the prices was brought down way below where the value is because of people’s pessimism. They then acted promptly and bought those stocks at a bargain price. After that, their job is to patiently wait for the market value to come back close to where the real value is. In the long run, price will always follow value. Like Benjamin Graham said that in the short run, the market is a voting machine; but in the long run, the market is a weighing machine.

Just a week ago, in an interview on CNBC after buying a stake in Goldman Sachs, Buffet said: “And, you know, five years from now, ten years from now, we'll look back on this period and we'll see that you could have made some extraordinary buys. That doesn't mean it won't get more extraordinary a week or a month from now. I have no idea what the stock market is going to do next month or six months from now. I do know that the American economy, over a period of time, will do very well, and people who own a piece of it will do well.”

So learn from masters, don’t follow market’s mood, explore it.