Learn to invest with Buffett

Chapter 19

Chapter 3 Section 3 Adhere to long-term investment and try to avoid short-term investment
Frequent trading is of no benefit to investors, it just fattens securities firms.

--Warren Buffett
The stock market is always going up and down, and every investor knows this.So what is the law of stock price fluctuations?

Buffett learned the eternal laws of stock market volatility from his mentor, Graham, and told us in Berkshire's 1987 annual report, "In the short run, the market is a voting machine; but in the long run , it is a weighing machine".

This means that short-term price fluctuations in the market will bring great risks to investors, but in the long-term trend, the market price will gradually stabilize and truly reflect the value of the enterprise.It takes an average of 6 to 30 months for a sufficiently undervalued stock to be corrected.

Graham pointed out in "The Intelligent Investor" published in 1949, "The stock market itself has no time for this kind of scientific thinking. Although there is no correct method of measuring value, it must first establish the value and then look for it. Its basis. The stock price is therefore not the result of careful calculations, but the aggregate effect of different investor responses. The stock market is a voting machine, not a weighing machine. It does not respond directly to actual data, only when It reacts when the data influences the decisions of buyers and sellers."

A large number of empirical studies on the stock market over the past 50 years have shown that Graham's view that the stock market is a voting machine in the short term and a weighing machine in the long term is completely correct.In his view, it is normal for the stock market to experience sharp price fluctuations in the short term, but in the long run, the stock market will eventually return to value.

Although the price trend of a stock is also affected by the broader market, it is the trend change in the fundamentals of the listed company that determines its price trend.If the benign development trend of a listed company's future profits can be clearly predicted, and its current value level is also appropriate, for those investors who trade at the annual level rather than at the monthly, weekly, and monthly level, the market will benefit. Uncertainty is indeed the determining factor.

Stock returns may also have a positive and negative relationship in the short term, such as a week or a month, but in the long run, stock returns may show a negative serial correlation.After two, three or more years, the stocks that were originally rising may fall instead, and the stocks that were originally falling may rise.

巴菲特以实际数据证明了这一观点。他以1899年～1998年100年间美国股市走势经常与GNP走势完全相背离的原因作事例，认为美国股市20年的整体平均实际投资收益率大约在6%～7%左右，但短期投资收益率会因为利率、预测投资报酬率、心理因素的综合作用而不断波动。

Buffett pointed out in the "Fortune" magazine on November 1999, 11: American investors should not be dazzled by the soaring stock market. The overall price level of the stock market deviates too far from the intrinsic value.He predicts that the U.S. stock market will soon fall sharply, returning to value.Sure enough, in 22, the dot-com bubble burst and Nasdqe fell nearly 2001%.

Two years later, Buffett once again published his views on the stock market in the magazine. He reiterated that the overall performance of the stock market is related to the overall growth of the US economy in the long run, and that excessively high prices will definitely return to their intrinsic value in the long run.

In this article, Buffett uses historical data from 1899 to 1998 to explain why the trend of the US stock market deviates from the trend of GNP completely?His research proves that the 100-year average return on investment in the United States is about 20%, but short-term investment returns will fluctuate continuously due to the combined effects of interest rates, predicted return on investment, and psychological factors.It uses detailed historical data to explain why the stock market is a voting machine in the short term, but a weighing machine in the long run.

Buffett encourages investors to buy stocks and hold them for a long time.Because the longer the outstanding stock is held, the greater the total return will be.But if you listen carefully to what he said, you will find that he has added two additional conditions when encouraging long-term holding:
1. These companies must be good companies.Fund managers around the world hold hundreds (Asian) or even thousands (US) stocks at any one time.Let me ask: Are there really so many excellent companies in the stock market?This kind of investment method of casting a wide net is definitely not the investment concept of successful investors.

2. We can only continue to hold these excellent companies if they continue to be excellent.This shows that investment should not be [-]% sure to be forever, but to observe the market all the time.

In fact, even if a company's fundamental advantage still exists, if we find that there is another competitor that also has this advantage, but the stock price is only half of it, we can sell the former and buy the latter.Buffett sold most of his McDonald's stock in 1997, as evidenced by his purchase of another fast food company.Although Buffett said that these are two unrelated transactions, he still thinks that McDonald's is a very good company that can be bought when the price is correct, but it also shows the existence of the phenomenon of swapping industry stocks.

Generally speaking, Buffett will not publicly sell the stock he holds until the last moment, and it is not easy for investors to figure out his investment trajectory.Therefore, instead of imitating Buffett's investment style, it is better to learn his way of thinking first. Perhaps this will help investors grasp the essence of his investment philosophy.

Buffett suggested that every investor should give himself a card, on which he is only allowed to make 12 small holes, and every time he buys a stock, he must make a hole, and after making 12 holes, he can no longer buy stocks. Can only hold shares.This will turn investors into long-term investors in really good companies.

As ordinary investors, they need to patiently hold their investment portfolios and not be tempted by other people's short-term profits.

Investment motto:

When we invest in stocks, short-term stock price fluctuations will bring great risks to our investment, but in the long run, we can predict the trend of the market very well, so as to better guide our investment decisions.

(End of this chapter)