Warren Buffett: Beyond Logic: Why Markets Still Panic in the Digital Age

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In a section titled Our Not-So-Secret Weapon in his latest Berkshire Hathaway Annual Letter, Warren Buffett explains how the stock market can still be irrational and prone to panics, regardless of the stability of investors or advancements in technology.

His key takeaways include:

  • Market volatility: Even good businesses can be mispriced, and unexpected crashes can occur
  • Emotional investors: Despite technology, investors still exhibit impulsive behavior
  • Focus on activity: Wall Street prioritizes high volume over sound investment advice
  • Occasional opportunities: Market downturns may offer opportunities for large-scale investments
  • Long-term focus: Despite short-term volatility, well-chosen investments with a long-term perspective can be rewarding

Here’s an excerpt from the letter:

Occasionally, markets and/or the economy will cause stocks and bonds of some large and fundamentally good businesses to be strikingly mispriced. Indeed, markets can – and will – unpredictably seize up or even vanish as they did for four months in 1914 and for a few days in 2001.

If you believe that American investors are now more stable than in the past, think back to September 2008. Speed of communication and the wonders of technology facilitate instant worldwide paralysis, and we have come a long way since smoke signals. Such instant panics won’t happen often – but they will happen.

Berkshire’s ability to immediately respond to market seizures with both huge sums and certainty of performance may offer us an occasional large-scale opportunity.

Though the stock market is massively larger than it was in our early years, today’s active participants are neither more emotionally stable nor better taught than when I was in school.

For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young. The casino now resides in many homes and daily tempts the occupants.

One fact of financial life should never be forgotten. Wall Street – to use the term in its figurative sense – would like its customers to make money, but what truly causes its denizens’ juices to flow is feverish activity.

At such times, whatever foolishness can be marketed will be vigorously marketed – not by everyone but always by someone.

Occasionally, the scene turns ugly. The politicians then become enraged; the most flagrant perpetrators of misdeeds slip away, rich and unpunished; and your friend next door becomes bewildered, poorer and sometimes vengeful. Money, he learns, has trumped morality.

One investment rule at Berkshire has not and will not change: Never risk permanent loss of capital.

Thanks to the American tailwind and the power of compound interest, the arena in which we operate has been – and will be – rewarding if you make a couple of good decisions during a lifetime and avoid serious mistakes.

You can read the the entire letter here:

Berkshire Hathaway 2023 Annual Letter 

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Tobias Carlisle is the founder of The Acquirer’s Multiple®. He is also the founder of Acquirers Funds®. The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates.