Tuesday, May 12, 2009

Voting machine v/s Weighing machine

"Stock market is a voting machines in the short term. It is a weighing machine in the long term."- Warren Buffet

Gem of wisdom from one of the best investors of all time. In the short term, some stocks are so hyped that it feels as though it is a popularity contest among stocks than anything else. It's only after a long time, real value rises up to the top after the fancy has faded. This is especially true of so called new age stocks. Go back and see what has happened to many high flying stocks of  last dot com boom etc.

Buffet does not get caught up with voting contests. He weighs them. In order to weigh a stock, he would like to understand them. Because weighing a stock here means finding its intrinsic value over a long time. That's why Buffet does not invest in stocks that he does not understand. Look at his holdings. All boring companies. Soft drink company (Coke), a few insurance companies, metals, food etc. Basically bread and butter kind of stocks. Despite this,his holding company has beaten market over and again. He too has had a poor streak over last few years but his performance has not been worse than the market in general.

This is not to mean that you should stay away from new age companies. Important thing is to understand what you are trying to accomplish. If you spot a good opportunity with a fancy stock, go and buy it. But, be sure to know when to sell it as well because popularity wanes as fast as it rises.

By the way. Buffet's new biography 'Snowball' is a great read. I listened to the audio book recently. It is the first book by any author that Buffet has authorized. He has spent several hours with the author and that shows up in the authenticity of the book. Several nuggets of wisdom from this man's life. You may enjoy reading or listening to it.


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