Invest Significantly at the Maximum Point of Pessimism 179Pessimism Leads to Value
A value - oriented investment approach in the style of Graham
and Buffett is not designed for bull markets. 3 If our stock market
were always bullish, there would be no need for a value investing
approach. Unfortunately, markets can ’ t go up forever, so value
investing — the act of purchasing assets or securities for less than
what they are worth — focuses on markets characterized by declin-
ing prices and valuations. During bull markets, a lot of people are
mistaken for investment geniuses when in fact it ’ s the rising tide
that ’ s moving them up in the world. Bear markets, however, distin-
guish the intelligent investor from the fl y - by - night speculator.
In his 1961 letter to partners, a 31 - year - old investor in Omaha
named Warren Buffett said that they should be judging him dur-
ing times of turmoil and not times of jubilance. “ I would consider
a year in which we declined 15% and the [Dow Jones Industrial]
Average 30%, to be much superior to a year when both we and
the Average advanced 20%. ” Very early on in his career, Buffett was
aware that performing well during market turmoil was the key to
long - term success as an investor. During the 13 years that Buffett
ran his partnership, not only did his performance destroy the Dow
Jones Average during both bull and bear markets, but he also never
had a down year. While other investors have come along and pro-
duced records that outshine Buffett ’ s, Buffett ’ s preservation of cap-
ital has allowed him to compound money at a staggering rate.
It should come as no surprise that the most fertile hunting
ground for picking up good companies cheap is during the height
of bear markets, when fear and uncertainty run rampant. Fear is
an emotion. When investors are making decisions based on emo-
tion, such decisions are very likely to be irrational. Numerous
psychological studies have demonstrated that humans feel the pain
of loss much more acutely than the pleasure of gain. Merely sitting
on losses, even ones that have not yet been realized, is too painfulCH009.indd 179CH009.indd 179 9/2/09 11:49:57 AM9/2/09 11:49:57 AM