Most investors know that the stock market is a not a living breathing thing and has no idea who any individual investor is. Yet many investors behave as if the stock market was alive and well, working to attack their investment ideas. In fact the stock market is neither friend nor foe - it exists to serve the buyer and seller of securities. Emotion is the greatest enemy the investor faces.
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Have No Fear
The best way to overcome emotion is to combat it with data and research. Armed with your own analysis based on the company and industry data, you are less likely to fail victim to your emotion. Let's go back to the 1970s when an unknown investor named Warren Buffett began buying shares in the Washington Post (NYSE:WPO). In 1973 Buffett began buying the Washington Post when the market cap was $80 million. Buffett's research and data led him to conclude that the assets of the Post - newspaper, cable, magazines - were worth over $400 million. So Buffett began buying loads of the Post. Shortly thereafter, the market value declined to under $50 million. (For more, check out Think Like Warren Buffett.)
To the emotional investor, such a decline would have likely led to a sale of the position. Buffett, armed with his data and analysis, concluded that the Post was even cheaper and bought more. He did not care about the stock market, the stock price of the Post, or what other investors thought. He remained independent. The rest is history: that original $10 million investment is now worth nearly $1 billion.
No Emotional Garbage
Even today, despite the economy, investors should all be thinking in a similar fashion. Let the data determine whether or not a business is an attractive investment at the current price. Consider a company like waste management business Republic Services (NYSE:RSG) which doesn't appear on many value radar screens. Depression, recession or expansion, waste management is a necessity. Landfill space is becoming very rare and company's like RSG and Waste Management (NYSE:WM), the two largest waste management businesses, own lots of them. In addition, in many locations, citizens only have one or two choices of which waste management company to use. So in essence both have certain monopolistic-like characteristics. Not surprisingly, the stable nature of these businesses appeals to Buffett as he continues to buy shares in Republic Services for Berkshire Hathaway (NYSE:BRK-A).
Few lessons in investing are more valuable than understanding the realities of the stock market. It a simple lesson to understand but far more difficult to execute. (For more, check out Warren Buffett: The Road To Riches.)
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