A couple of decades ago, legendary investor Warren Buffett said “Market Fluctuations are your friend, not your enemy… profit from the folly rather than participate in it”
In this article, we will understand the quote in more detail and also go through what Buffett himself has said about market fluctuations.
The stock market is volatile. It does not go up in a straight line. It goes up, then falls, then goes up once again.
Most less-experienced investors aren’t emotionally equipped to handle the volatility.
They sell when they should be buying and buy when they should be selling (or just continue to hold).
When market fluctuation is towards the downside, the fear rises with every fall. Bottoms in the market are usually created when fear is at its absolute peak. At this point, most are sellers – who are “participating in the folly” of selling shares at ridiculously low prices.
The opposite happens when the market fluctuation is towards the upside, greed increases with every rise. Tops are usually created when greed is at its absolute peak. At this point, most are buyers – who are now “participating in the folly” of buying shares at ridiculously insane prices.
Not much would have changed business-wise, what has changed is the sentiment and emotion of the market participant.
Instead if market falls are looked at as opportunities to invest more – and if extreme market euphoria are treated like opportunities to move some portion of your investment to cash. An investor is “profiting from the folly rather than participating in it”
The quote makes it sound easy, but selling in a roaring bull market and buying in market crashes (like Covid crash) can be extremely difficult even for investors who have decades of experience in the stock market.
The easier thing to do, however, is to buy quality companies at low prices during market downturns and holding on to investments for long periods of time – through all the ups and downs.
Some words from Warren Buffett:
- The stock market is the most obliging money-making place in the world. Because you don’t have to do anything.
- 1000s of businesses are priced at the same price for the buyer and the seller. The price changes everyday, you have a lot of information about those businesses – and yet, you do not have to do anything.
- Compare that to any other investment alternative that you have got. You can’t do that with farms – if you own a farm and another guy has a farm next to you. You kind of like to buy them out. He is not going to name a price everyday at which he will buy your farm or sell you his farm. But you can do that with Berkshire Hathaway or IBM (or all the other listed stocks).
- The stock market is a marvelous game, the rules are stacked in your favour. As long as you don’t behave like a drunken psychotic.