Establish a Sound Investment Philosophy 53click of a mouse causes most investors more harm than good. Of
course, if you fi nd yourself in a fi nancial bind and need access to
capital, the liquidity of the stock market helps you, but I assume
that you are investing capital that will not be needed for meaning-
ful periods of time. In this case, the liquidity of the stock market is
not as benefi cial as you might think. Paying constant attention to
the daily fl uctuation in stock prices can infl uence you to make very
poor investment decisions.
As an investor, your goal is to let the market give you the
opportunity to buy and sell at attractive prices, not instruct you
on when to buy and sell. It is not uncommon for two investors
investing in the same security to have materially different invest-
ment results, even to the extreme where one result is gain and the
other is a loss. The reason is due to the price paid for the invest-
ment. Value investors approach the market as a proxy for deter-
mining whether security prices are undervalued, fairly valued, or
overvalued. They don ’ t allow the market to formulate their invest-
ment decisions. This distinction between guidance and instruc-
tion is very subtle and often is blurred, especially when the market
is experiencing periods of wide price fl uctuations, or volatility.
Referring back to the e - mail I received, it ’ s obvious that this indi-
vidual was being infl uenced by the rapid decline in the stock price
although the business was doing just fi ne. He let the market vola-
tility instruct him and make him feel that he had made a mistake.
Make no mistake, it ’ s not easy to watch your investment decline
by 20 percent in a week or two and not feel like you have made a
dumb move.
Between September 15 and 19, 2008, the Dow Jones experi-
enced one of the most volatile trading weeks in history. The mess
created by the excessive and irresponsible mortgage and securitiza-
tion practices came very close to creating a fi nancial catastrophe.
Whether you agree with the government bailout or not, without it,
the market contagion that would have resulted would have made theCH004.indd 53CH004.indd 53 9/2/09 7:06:50 PM9/2/09 7:06:50 PM