After several rough days in the stock market, things improved greatly yesterday. Stock prices rallied for the day, closing about 1.2% higher than when the day's trading began. And early morning indicators point to another solid gain for stock prices again in today's trading.
So what's the lesson to be learned, if any? In my opinion, the lesson is simply that we as individual investors should stay focused on our long term objectives and try to not be overly emotional about short term market declines. This too shall pass, so let's try to keep our eyes on the real prize down the road.
You see, there are two absolute certainties associated with the stock market: over the short term, nobody really knows whether prices will increase or decrease; and over the long haul, prices will increase substantially. Accordingly, understanding and abiding by the rule of 72 (money invested doubles when the average annual rate of return multiplied by number of years = 72) is of critical importance to successful individual stock market investors.
There will undoubtedly be a lot of noise in the short term and some considerable market drops will occur from time to time. In other words, prices will 'fluctuate' in the short term, and sometimes by a lot. And that's about all there is to know about the vast majority of short term market moves, regardless of what the pundits and so-called market experts want us to believe.
The simple fact is that some days prices go up and some days they go down. And when looking at trading on a daily basis, that's only one thing we can ever know for sure --- that prices will fluctuate. {For a summary of the market action yesterday, see U.S. Stocks Rebound After Sharp Selloff.}
So what does all this daily price volatility mean? Not much, if we're long term investors. But long term investors who are planning to buy or sell a specific stock have an additional edge over short term traders --- we can wait for Mr. Market to select an opportune time to do our infrequent but highly consequential individual buying and selling, aka trading.
In sandlot baseball, the batter can afford to sit back and wait for just the right pitch to hit. Since there's no umpire calling balls and strikes, there's no hurry to swing at anything hard to hit. And it's the same thing when it comes to successful individual investing. We can afford to relax and wait for the right pitch to come our way.
Now let's see what famed investor 'Warren Buffet Says Mr. Market Is A Drunken Psycho' has to say about all this:
"When asked about the philosophy that brought him an estimated net worth of about $74 billion, Warren Buffett did not shy away.
“Pay no attention to headlines in the paper or people on television or anything, but put aside a little money each month. I'd put it in a very low-cost index fund. And if you do that regularly throughout your working career, you're bound to have a substantial amount of capital.”
Buffett did caution to not try to time the market and pick individual stocks, but to “just put X dollars per month away and you'll live a very comfortable life.”. . .
“You've got your choice of thousands of businesses. Now, the best thing for most people is to buy a cross-section of them. But . . . the prices change everyday.”
He added: “This imaginary person out there -- Mr. Market -- he's kind of a drunken psycho. Some days he gets very enthused, some days he gets very depressed. And when he get really enthused, you sell to him and if he gets depressed you buy from him. . . ."
Buffett ended . . . with another simple mantra: “Emotions are contagious, and emotions have no business in investing.”"
Summing Up
When Warren Buffett talks, individual investors should listen carefully.
And that's simply because simple and straightforward advice from someone who's 'been there and done that' is worth far more than we will have to pay for it.
And when that simple, straightforward and sound advice is free, so much the better.
With respect to an unsurpassed record of successful investing over a long period of time, Buffett represents the 'gold standard.' He has definitely 'been there and done that.'
So relax and enjoy the long term ride.
That's my take.
Thanks. Bob.
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