Why should investors rejoice when markets crash?

When the markets are crashing and when people are dumping stocks as if the stocks have caught rabies, think of this little quiz by Warren Buffett (taken from 1997 Berkshire Hathaway’s Shareholder Letter):

“If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.

But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?”

Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying.

This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

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4 thoughts on “Why should investors rejoice when markets crash?

  1. Shhhh! Don’t tell people the “truth”. Aiya then again this truth has been around for such a long time, yet people still feel elated when stock prices rise and depressed when they plunge.

    But as I watch the Euro crisis unfold like a slow-motion train wreck, I am feeling more and more pleased as Mr. Market becomes more manic-depressive and pessimistic by the day! :D

    • Hi Createwealth8888,

      I think it’s wiser to buy bit by bit and have a percentage paper loss in your stock to start buying, as a gauge. I usually have a target of 15-20% loss (during a crash) and 10% loss (during normal times) to start averaging down. So, by doing this, one doesn’t need to time the market to wait for the “real” market crash. If I’m waiting to take a new position for a stock not in my portfolio, I have a target price and buy a few lots first, no matter what the market conditions are. I can look at charts a bit to get a the “correct” price but I will not pay too much attention to it. Then, if prices decrease further, I will buy more.

      Unrealized losses will surely increase during a major recession and one must be strong-willed enough to sit through it, save up more and average down. This is part of smart investing anyway.

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