One of the great things about investing is that you never have to buy a stock. Not having a position in a company is just as relevant as having a position. There's never any compulsion to buy a specific security, and likewise, there's never any requirement to sell.
This is the mantra that has defined Warren Buffett (Trades, Portfolio)'s investment outlook for the past few decades. He has never invested in anything he does not understand. He only buys stocks he knows and understands well. Everything else the Oracle of Omaha stays away from. He's quite happy to let other investors buy and sell and fight it out.
This is probably one of the most underrated qualities of successful investors. It takes a lot of restraint to step back and watch the market fight it out if other investors are making money. In fact, this is one of the driving forces of the stock market.
When an individual security starts going up, it attracts other investors, who keep buying, sending the stock higher, which attracts new investors, and so on. The same can happen in the opposite direction. When sellers start to emerge in a stock that has run-up in value substantially, sentiment can quickly shift and send the security plunging.
The market is driven in part by emotion in the short term, and this has been known for nearly 100 years now. Mentions of Benjamin Graham have virtually disappeared from financial sites in recent years, but this man was writing about the emotional roller coaster investors may face in the 1930s. His Mr. Market analogy is just as true today as it was all those years ago:
"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." -- 1987 letter to Berkshire Hathaway shareholders."
The critical thing to remember is that Mr. Market is quite happy to be ignored. As Buffett's letter in 1987 when on to state:
"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."
This comment will always be relevant because the market will always have prices available, and there is never any obligation for investors to accept these prices. We can sit back and watch the market, and we only need to act when we think it's worth taking advantage of the price that's on offer.
It has nothing to do with whether or not we think the market is overvalued or in a bubble. Individual securities deserve individual analysis. One stock can be undervalued while another is overvalued. The key is waiting, saying no to anything that does not make sense, and then acting quickly and with conviction when opportunities present themselves.
It's a strategy that has rewarded many investors handsomely over the past century or so, and I think it's more likely the same playbook will continue to work for many decades to come.
Disclosure: The author owns no share mentioned.
Read more here:
- The Current Market, Warren Buffett, Cinderella and Known Unknowns
- Charlie Munger the Entreprenuer
- A Look at Why Mohnish Pabrai Is Still Holding Rain Industries
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