Tuesday, September 30, 2008

The New Buffettology: Chp 1: The Answer to Why Warren Doesn't Play the Stock Market

This book review summarizes the ideas and opinions of Mary Buffett and David Clark. Warren Buffett did not participate in the writing of the book.

The authors opine that Warren has created tremendous wealth by not playing the stock market but rather by playing the people and institutions who play the market. They explain that Warren capitalizes from market participant's short sightedness and pessimism by buying the great quality stocks that others are panicking to sell. The author's state that the vast majority of stock market participants are short term motivated and this is one reason why Warren has been able to prosper with his selective contrarian investing techniques.

The other major reason why Warren has been so successful as an investor, is that he has recognized that the long term economics of a business will eventually prevail and reflect appropriately in companies' share prices. Undervalued companies with strong underlying business economics will eventually be repriced upwards and overvalued companies will eventually be re-priced downwards in the market.

Some examples of when we may observe over-pessimistic stock prices are during times of uncertainty (war is mentioned), major industry downturns or missed quarterly earnings. Warren's genius is that he understands the short-term market mentality that dominates the stock market and also that this mentality acts to undervalue great businesses. He then buys those great businesses at bargain prices from a long-term economic point of view.

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